This is not another banking crisis, analysts say — it’s ‘sentiment contagion’ instead
A slogan is written on the sidewalk in front of the global headquarters of Swiss bank Credit Suisse the day after its shares dropped approximately 30% on March 16, 2023 in Zurich, Switzerland.
Arnd Wiegmann | Getty Images News | Getty Images
The collapse of U.S.-based Silicon Valley Bank, the biggest bank failure since the global financial crisis, and the emergency rescue of Credit Suisse by Swiss rival UBS, sparked a sell-off in banking stocks as contagion fears spread.
Deutsche Bank was the next target, with shares plunging and the cost of insuring against its default spiking at the end of last week — despite the German lender’s strong capital and liquidity positions.
The market panic appeared to subside Monday after First Citizens agreed to buy a large chunk of failed Silicon Valley Bank’s assets. The S&P 500 Banks index climbed 3% on Monday, but remains down 22.5% over March, while in Europe, the Stoxx 600 Banks index closed 1.7% higher Monday but has shed more than 17% this month.
The volatility — at times in the absence of any discernible catalyst — has led market watchers to question whether the market is operating on sentiment rather than fundamentals when it comes to fears of a systemic banking crisis.
“This isn’t like Lehman Brothers subject to counterparty risk in complex derivatives during the subprime mortgage crisis,” Sara Devereux, global head of the fixed income group at asset management giant Vanguard, noted in a Q&A Friday.
“The banks in recent headlines had risk management issues with traditional assets. Rapidly rising rates exposed those weaknesses. The banks were forced to become sellers, realizing losses after their bond investments were well below face value.”
She suggested the likes of SVB and Credit Suisse may still be standing today had they not lost the confidence of their clients, evidenced by massive depositor outflows from both banks in recent months.
“It was more of a ‘sentiment contagion’ rather than the true systemic contagion we saw during the global financial crisis. Vanguard economists believe that the damage has been largely contained, thanks to the quick action of federal agencies and other banks,” Devereux said.
This view was echoed by Citi, which concluded that in the absence of a clear explanation for Friday’s moves, what we are seeing is an “irrational market.”
The slide in Deutsche Bank’s stock price — which fell 8.6% Friday — could be one example of this. The bank launched a huge restructuring effort in 2019 and has since posted 10 straight quarters of profit. Shares recovered 6.2% on Monday to close above 9 euros ($9.73) per share.
There was some speculation that the drop could have been driven by Deutsche’s exposure to U.S. commercial real estate or a Department of Justice (DoJ) information request to a number of banks in relation to Russian sanctions, but Citi joined the chorus of market analysts concluding that these were insufficient to explain the moves.
“As we witnessed with CS, the risk is if there is a knock on impact from various media headlines on depositors psychologically, regardless of whether the initial reasoning behind this was correct or not,” the strategists added.
Is Europe different?
Dan Scott, head of Vontobel Multi Asset, told CNBC on Monday that the introduction of the Basel III framework — measures introduced after the financial crisis to shore up banks’ regulation, supervision and risk management — means European banks are all “heavily capitalized.”
He pointed out that ahead of its emergency sale to UBS, Credit Suisse’s common equity tier 1 ratio and liquidity coverage ratio, both key metrics of a bank’s strength, suggested the bank was still solvent and liquid.
Scott said failures were an inevitable consequence of rapid tightening of financial conditions by the U.S. Federal Reserve and other central banks around the world in a relatively short space of time, but he stressed that big European lenders face a very different picture to small- and medium-sized U.S. banks.
“We’ve seen a lot of stuff breaking and haven’t really been paying attention because it’s been outside of regulated capital. We saw stuff breaking in the crypto world but we just kind of ignored it, then we saw SVB and we started paying attention because it was getting closer and closer,” Scott told CNBC’s “Capital Connection.”
“I think the issue is on the small- and medium-sized banks in the U.S., they are not Basel III-regulated, they haven’t been stress-tested and that’s where you start seeing real issues. For the core, the big cap banks in Europe, I think we’re looking at a completely different picture and I wouldn’t be concerned.”
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