Global financial markets have come under severe pressure after the collapse of Silicon Valley Bank, despite governments on both sides of the Atlantic taking extraordinary measures to maintain confidence in the banking system.
On a day conjuring up memories of the 2008 financial crisis, the US president, Joe Biden, sought to restore calm by insisting the US banking system remained safe, while HSBC stepped in to buy the UK arm of the failed technology lender after a deal brokered by the British government and the Bank of England.
“Americans can have confidence that the banking system is safe,” Biden said in a statement from the White House. “Your deposits are safe … we will not stop at this, we will do whatever is needed.”
However, shares in US and European banks sold off sharply amid a crisis of confidence in global markets over the health of the financial system. Government bond prices soared as investors rushed for safe-haven assets, while economists suggested the febrile conditions in global markets could force the world’s most powerful central banks to stop raising interest rates.
Shares in regional American lenders were thrown into a tailspin, led by a more than 60% collapse in the value of California-based First Republic Bank, and similar double-digit declines for lenders including Western Alliance Bancorp and PacWest Bancorp amid frenzied speculation over contagion risks.
Rating agency Moody’s on Monday downgraded the debt ratings of the collapsed Signature Bank deep into junk territory and placed the ratings of six other US banks under review for a downgrade.
The banks placed under review for downgrade were First Republic Bank, Zions Bancorporation, Western Alliance Bancorp, Comerica Inc, UMB Financial Corp and Intrust Financial Corporation.
Moody’s, which rated Signature Bank’s subordinate debt “C”, said it was also withdrawing future ratings for the collapsed bank.
The KBW banks index, which includes the biggest American banks, fell by more than 10%, even as the US benchmark S&P 500 index and Dow Jones industrial average rose by about 0.5%.
In London, shares in the UK’s biggest banks tumbled, with Barclays and Standard Chartered dropping by more than 6%. Markets across Europe sold off sharply, as the FTSE 100 tumbled by 2.5% in the biggest one-day fall since last summer.
It came as the UK government rushed to strike a last-minute deal for HSBC to buy SVB’s UK operations, aiming to save thousands of British tech startups and investors from stinging losses after the biggest bank failure since 2008.
The takeover will override the Bank of England’s initial decision to place SVB UK into insolvency, after a run on the lender that was originally caused by fears over a multibillion-pound shortfall on the US parent company’s balance sheet.
SVB had invested heavily in US government bonds but the recent rises in interest rates have resulted in a fall in value, at the same time as the bank faced rising demands to return cash to depositors as the tech sector came under pressure.
In a crisis threatening to overshadow the UK government’s budget on Wednesday, the prime minister, Rishi Sunak, sought to offer reassurance that Britain’s financial system remains sound despite the escalating risks.
Speaking from San Diego on a trip to hold talks with the US president over a major defence deal, he said that UK banks “don’t have any concerns about systemic risk” in the country’s financial system.
Sunak said SVB’s customer base of tech startups and fast-growing companies were important for the British economy, while adding: “They make me look forward to the future with confidence now, having access to the resources by HSBC to help grow their businesses and continue to provide jobs across the UK. So it’s been a good outcome.”
However, analysts warned that further steps could be required to shore up fragile confidence in the banking system despite a backstop plan launched on Sunday night by the US Federal Reserve to give government backing to US depositors’ money.
Bill Ackman, the Wall Street hedge fund investor, praised the steps taken to restore confidence, although he warned that more banks would still probably fail, tweeting: “Had [US regulators] not intervened today, we would have had a 1930s bank run continuing first thing Monday causing enormous economic damage and hardship to millions.
“More banks will likely fail despite the intervention, but we now have a clear roadmap for how the gov’t will manage them.”
On Sunday, regulators in the US announced the closure of a second bank, the New York-based Signature. Depositors in Signature and SVB are protected by the Fed intervention, along with any other that runs into difficulties, but investors in both have been wiped out.
The meltdown at SVB and pressure on other regional American banks comes as the financial system responds to the rapid increase in interest rates launched by the US Fed and other major central banks in response to sky-high inflation.
Analysts at Capital Economics in London said the situation remained in flux but suggested the US and wider global financial system was more capable of withstanding the market turmoil than during the 2008 financial crisis when Lehman Brothers collapsed.
“But it illustrates the extent to which vulnerabilities are lurking in the financial sector and strengthens the case for central banks to exercise caution in raising rates further as the effects of policy tightening so far become apparent,” they said.
Goldman Sachs analysts said they no longer expected the Federal Reserve to raise rates again later this month as the casualties in its battle to bring down high inflation emerge in a financial system accustomed to cheap money.
Financial market expectations for significant further rate increases from the Bank of England and the European Central Bank also eased on Monday.
