‘Bank Fears Go Global’: Stock Market Dips as Fallout from U.S. Bank Failures Spreads Around the World
The worst may not be over. The Silicon Valley Bank and Signature Bank failures continue to roil stock markets and have cued further shock to the global banking system.
There was an uptick in the stock market on Tuesday, which followed in the wake of assurances from the Biden administration that business depositers in the failed banks would have their assets restored.
“The S&P 500 rose 1.5 percent in morning trading, recouping some of its losses from the rapid collapse of Silicon Valley Bank and Signature Bank, and pointing to a semblance of stability returning to financial markets,” the Times reported. “Investors appeared to take to heart assurances that depositors will be protected by federal authorities, helping to calm nerves in the banking sector.”
“First Republic Bank, one of the banks most in the crosshairs of investors in recent days, was up nearly 50 percent, having fallen by a similar amount on Monday,” the Times added. “Western Alliance Bancorp rose roughly 40 percent, following a fall of nearly 50 percent. The KBW Bank index, which tracks the performance of 24 banks, rose over 4 percent, its best day in roughly four months.”
But those gains are in danger of being reversed, as Wednesday as seen the return of banking fears.
“Stock markets tumbled on Wednesday, as investors’ fears over the health of the banking industry resurfaced and spread around the world, undoing a rally on Tuesday when the panic appeared to pause,” the Times reported.
“On Wall Street, the S&P 500 fell 1.6 percent at the open of trading, reversing all of the previous day’s gains,” the Times added. “European markets were also hard hit, with stocks of many of the region’s biggest banks falling sharply, as anxiety persists about the fallout from the collapse of Silicon Valley Bank and Signature Bank, which were seized by regulators after suffering devastating runs on deposits.”
A casualty of the bank contagion is Credit Suisse, which has failed to acquire Saudi backing for its depleted deposits.
“Credit Suisse shares fell 21% Wednesday after its Saudi backers ruled out more investment,” Markets Insider reported. “The embattled Swiss bank revealed ‘material weaknesses’ in its reporting on Tuesday. Shares in the pan-European Stoxx 600 index also tumbled in Europe, leading to trading halts.”
Saudi National Bank Chairman Ammar Al Khudairy said in a Bloomberg interview that it would not be coming to the aid of Credit Suisse.
“The answer is absolutely not, for many reasons outside the simplest reason, which is regulatory and statutory,” Al Khudairy remarked.
Silicon Valley Bank and Signature Bank do not carry the same risk exposures as Credit Suisse, which has a history of management issues.
But S&P Global Ratings analysts on Tuesday said about the global banking system that “SVB’s failure has shaken confidence.”
The SVB and Signature Bank failures also presents a unique challenged to the Federal Reserve Bank, as it continues to rein in core inflation with rate hikes, while maintaining significant liquidity to keep the U.S. economy from experiencing major economic contraction.
On Tuesday, the Consumer Price Index report indicated that while inflation remains high, it has significantly eased since last year’s month-on-month highs.
“The consumer-price index, a closely watched inflation gauge, rose 6% in February from a year earlier, down from a 6.4% gain the prior month,” The Wall Street Journal reported, citing the Labor Department. “It was the smallest increase since September 2021. When excluding volatile food and energy costs, prices advanced a slightly slower 5.5%. Economists view so-called core prices as a better indicator of future inflation.”
As WSJ further reported, the encouraging economic news had helped to spur a temporary gain in the stock markets.
“The S&P 500 rose 1.68%, the Dow Jones Industrial Average added about 1%, and the tech-centric Nasdaq Composite climbed 2.14%,” WSJ noted. “The yield on the benchmark 10-year Treasury note rose 0.118 percentage point to 3.633%.”
“Elevated inflation, combined with a strong labor market and solid consumer spending, appeared to put the Fed in a position to consider a larger interest-rate increase at its next meeting,” WSJ continued. “But the collapse of Silicon Valley Bank and other financial institutions could lead the central bank to move more cautiously to assess the state of the financial system.”
The banking system shocks come as the Federal Reserve Bank seeks to expand its oversight of alternative crypto-currency markets. The SVB and Signature Bank collapses have fueled volatility in the crypto markets, as the former bank in particular held deposits for crypto firms and exchanges, such as BlockFi. However, the crypto market has proven to be fairly resilient, despite volatility.
The Federal Reserve Bank has been exploring the development of Central Bank Digital Currency (CBDC). 11 nations thus far have implemented CBDCs, according to the Atlantic Council’s tracker.
The World Economic Forum supports the implementation of CBDCs to promote more “inclusion” into the global digital economy.
It cites America’s central bank, the Federal Reserve, as saying that if CBDC were to be introduced, it would be “the safest digital asset available to the general public, with no associated credit or liquidity risk.”
“The resilience of financial systems could also be boosted,” WEF adds. “If a natural disaster or the failure of a payments company made cash unavailable, a CBDC could provide a back-up, the International Monetary Fund says.”
More than 100 countries, including 19 G20 nations, are now exploring central bank digital currencies (CBDCs), the World Economic Forum noted.
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