The sale of failed Silicon Valley Bank (SVB) to a regional US peer and reports of a possible expansion of funding lifelines lifted banking stocks on Monday (Mar 27), easing worries about systemic stress and a looming credit crunch.
The sudden collapse of start-up focused SVB earlier this month after a bank run has triggered the worst banking shock since the 2008 global financial crisis and drawn some of Europe's biggest lenders into investors' focus.
Signs that SVB's failure is being resolved by authorities in a smooth manner could help underpin confidence, especially among fragile US regional banks, whose stocks rose sharply on Wall Street on Monday.
Broader indicators of financial market stress were also calmer, with government bond yields rising and the euro higher against the dollar.
First Citizens BancShares has bought all the loans and deposits of SVB, giving the Federal Deposit Insurance Corp (FDIC) equity rights in its stock worth as much as US$500 million in return.
First Citizens, which also has an agreement to share some potential losses with the regulator, saw its shares soar 44 per cent.
The FDIC estimates SVB's failure will cost a federal deposit insurance fund used to rescue banks about US$20 billion. The fund does not take US taxpayer money and is instead replenished by a levy on the entire banking sector.
"The bottom line is that the 2nd and 3rd largest bank failures are now resolved," wrote analysts at Wells Fargo led by Mike Mayo.
"The other one - Signature - cost the FDIC US$2.5 billion and similarly had no direct cost to taxpayers outside of the FDIC. This seems like a toll, especially on the largest banks, but can also show that the industry can absorb these problems and move on without outside assistance," they wrote.
The collapse of SVB and New York-based peer Signature Bank has left politicians wary of public perceptions that banks are being bailed out again, after anger over the sector's costly rescue in 2008.
The pair's closures also sent US depositors fleeing smaller regional banks for larger cousins.
Bloomberg News reported US authorities were in early stage deliberation about expanding emergency lending facilities which could give First Republic Bank more time to shore up its balance sheet.
Shares in First Republic, the future of which has been at the centre of investors' concerns, jumped by more than 14 per cent on Monday, with peers Western Alliance Bancorp and PacWest Bancorp climbing 7 per cent and 3 per cent, respectively.
Major US banks JPMorgan Chase & Co, Citigroup and Bank of America advanced between 2 per cent and 3.5 per cent.
The First Citizens deal for SVB sealed the first weekend in several weeks that did not bring news of fresh banking collapses, rescues or emergency help from authorities.
Banking stocks in Europe also rebounded after a torrid previous session. Germany's biggest lender Deutsche Bank , which had slumped 8.5 per cent on Friday alongside a sharp jump in the cost of insuring its bonds against default, rose 6.4 per cent.
The Stoxx index of top European bank shares is still down more than 17 per cent this month, however, and the US KBW regional bank index has lost 20 per cent, with investors on edge about what's next.
The sudden spike in tensions for banks has raised questions about whether major central banks will continue to pursue aggressive interest rate hikes to tamp down inflation, and whether tightened lending will hurt the global economy.
A US Federal Reserve policymaker said on Sunday that stress in the banking sector is being closely monitored for its potential to trigger a credit crunch.
In a credit crunch, banks restrict the amount they are willing to lend to consumers and businesses due to heightened concerns about their customers' ability to pay back their loans.
Some small and concentrated crunches can weigh on growth without bringing the full economy to a standstill. Deeper lending clamp-downs can hobble the economy for years.
Even before the present crisis erupted, bank lending to euro zone companies had slowed for the fourth straight month in February as an economic downturn and increased caution from lenders appeared to take their toll.
In the United States, where flows into less risky money market funds have risen by more than US$300 billion in the past month to a record atop US$5.1 trillion, focus is on depositors' confidence.
The SVB deal may shore some of that up. First Citizens said it would take on assets of US$110 billion, deposits of US$56 billion and loans of US$72 billion, and expand in California. The FDIC retains some US$90 billion in securities held for disposal.
"We see the sale of SVB to a regional bank as politically helpful to the banks. It allows the industry to argue that large regionals can be resolved without help from the mega banks," said analysts at TD Cowen.