US banking regulators have approved a plan to protect depositors of Silicon Valley Bank (SVB) and Signature Bank in New York. Depositors of both banks will have full access to their funds from Monday. Additionally, the Federal Reserve will create a Bank Term Funding Program that provides loans of up to one year for affected institutions.
Three key points:
- Deposit protection plans have been approved for Silicon Valley Bank and Signature Bank in New York.
- Depositors of both banks will have full access to their funds from Monday.
- The Federal Reserve will establish a Bank Term Funding Program that offers loans of up to one year for affected institutions.
S&P 500 and Nasdaq set for higher open after Fed announces emergency funding measures
European bank shares tumbled in morning trade on Monday and nervous investors piled into government debt as markets fretted over regulators’ moves to prevent the collapse of Silicon Valley Bank from spreading into the wider economy.
The region-wide Stoxx 600 was down 2.5 per cent as Credit Suisse fell 10 per cent and Commerzbank lost 12 per cent. Dutch bank ING lost 7.3 per cent. The European Stoxx banking index dropped 6.4 per cent.
Traders raced into sovereign debt, with the yield on the two-year US Treasury note, which is sensitive to interest rate changes, falling 0.4 percentage points to 4.1 per cent. German 10-year Bunds fell 0.2 percentage points to 2.2 per cent. Yields fall when prices rise.
Investors were digesting moves from authorities in the US and Britain, who worked over the weekend to insulate customers from the failure of California-based SVB and its UK arm on Friday. Authorities took over SVB, the bank for many US technology start-ups, after customers rushed to withdraw $42bn — a quarter of total deposits — in a single day.
US futures pared early gains as the selling pressure rose. Contracts indicated the benchmark S&P 500 index would rise 0.3 per cent at the open and the tech-heavy Nasdaq open 0.7 per cent higher.
“There’s a sense where markets are thinking that the Federal Reserve stepped in aggressively to stop problems spreading, but that doesn’t apply in Europe…cracks are starting to appear and it’s a reminder that if rates go up that could cause problems for [banking] institutions,” said Neil Shearing, group chief economist at Capital Economics in London.
US regulators set out emergency measures to protect the banking system after the collapse of SVB, with the Federal Deposit Insurance Corporation, Federal Reserve and Treasury saying depositors “will have access to all of their money starting Monday”. Regulators also shut down Signature Bank.
London’s FTSE 100 fell 2.5 per cent after the UK government confirmed that the UK business would be sold to HSBC. The Cac 40 in Paris fell 3 per cent.
The collapse of SVB, Signature and Silvergate in the last week raised investors’ fears over the value of banks’ bond portfolios, especially those that invested deposits in long-term Treasuries.
“The SVB situation is a reminder that Fed hikes are having an effect, even if the economy has held up so far. Concerns over bank earnings and balance sheets also add to the negative sentiment for the country’s equity markets,” said Mark Haefele, chief investment officer at UBS Global Wealth Management.
“We recommend investors who have above-benchmark weights in global financials to revisit their exposure.” Investors also began to question whether the Federal Reserve would waver on interest rate rises following the failure of the SVB, Silvergate and Signature banks in the past week. Investors had been pricing in a 0.5 percentage point rise after comments last week by Fed chair Jay Powell.
On Tuesday US consumer price index numbers will be released, the latest in a series of key data releases which will provide investors with clues as to the pace of the economy and probable interest rate rises. The dollar dropped 0.5 per cent against a basket of other currencies during morning trading. The pound rose 0.7 per cent against the dollar.
Equities in Asia were mixed. Japan’s Topix lost 1.5 per cent while Hong Kong’s Hang Seng index dropped 2 per cent and mainland China’s CSI 300 rose 1.1 per cent on Monday.
At an annual session of parliament on Sunday, Beijing announced it was keeping the head of the central bank and finance minister in their posts. China’s credit growth in February was also higher than expected, bolstering economic recovery hopes.
Shanghai Pudong Development Bank, which owns a stake in a joint venture with Silicon Valley Bank’s China unit, lost 1.3 per cent. Brent crude rose 0.3 per cent to $83.08 per barrel while WTI, the US equivalent, climbed 0.4 per cent to $77.04 per barrel.