Central banks must work to calm investors as a crisis of confidence in the banking sector looks to be spilling over to Europe, following the collapse of U.S. regional banks, money managers said.
The global banking sector hit headlines last week as Silicon Valley Bank and Signature Bank collapsed, and U.S. authorities stepped in to help depositors. Earlier this week, money managers said the difficulties for these banks were set off by interest-rate hikes.
While sources said there was little risk of spillover to bigger or European banks, due to the nature of SVB's business as a specialist lender, confidence has been hit in eurozone banks.
Credit Suisse on Thursday morning said it had taken "decisive action to pre-emptively strengthen liquidity" and intended on taking 50 billion Swiss francs ($54 billion) in support from the Swiss National Bank, via a covered loan facility and short-term liquidity facility. The SNB and Swiss financial regulator FINMA late Wednesday extended the offer of support to Credit Suisse after the bank's share price dropped more than 30% and the value of its debt securities had also "been particularly affected by market reactions in recent days."
The Swiss central bank and regulator also said "there are no indications of a direct risk of contagion for Swiss institutions due to the current turmoil in the U.S. banking market."
In the wake of the banking-related situation, it is now central banks' role to "focus on keeping investors' heads cool and to avoid dangerous situations that might not have been really warranted given objective facts but that has largely been triggered by a loss in confidence in the system," Tatjana Puhan, deputy CIO and managing director at TOBAM, said in an emailed response to questions. It's what the SNB has done for Credit Suisse, and what the Federal Reserve and European Central Bank also do for the banks in their own currency regions, she said.
Sentiment has weakened for global banks since the collapse of SVB, Signature Bank and Silvergate, "and obviously the crisis of confidence surrounding (Credit Suisse) did weigh on the European banking system to some extent," Eoin Walsh, portfolio manager at TwentyFour Asset Management, said in an emailed response to questions. The impact was felt in the broader equity market over debt markets, he said, "where moves were more orderly, but bonds did trade off in sympathy."
Mr. Walsh said the bond boutique, an affiliate of Vontobel Asset Management, doesn't expect Credit Suisse's move to secure support will weaken sentiment; rather, "if anything it should improve it."
"You could argue that, given the enhanced focus on the European banking system since the SVB collapse, it just emphasizes the strong regulatory regime we have here and the very strong capital levels European banks have, which should ultimately help support sentiment," Mr. Walsh said.
Regarding contagion, "it is very difficult to say to what extent European banks will really slide into a crisis because current investor reactions seem very much fear- and sentiment-driven," Ms. Puhan said. "The market is lost in translation, there are just too many indicators that can be used to tell a positive story or a negative story about where interest rates and the economy should go. Hence the need to calm down investors."
However, sources highlighted that it's important to remember that banks in general should be more resilient than they were in 2008, with improvements to enhance solvency and make balance sheets more robust.
"By common consensus, the major banks in Europe have cleaner balance sheets and better capital levels than they've ever had, and the regulatory regime is very strong," TwentyFour's Mr. Walsh said.
However, it remains unclear as to the extent to which higher interest rates and inflation "eventually decrease company margins and profitability so that credit distress risk increases significantly," Ms. Puhan said, adding that this impact will probably be seen with a lag.
While managers now expect the Fed to raise interest rates by 25 basis points next week, rather than previously anticipated 50 basis points, the ECB pressed ahead Thursday with its 50-basis-point hike.
The ECB needed to contain inflation "and they are doing their job," Ms. Puhan said. "The banking system should be more resilient and be able to digest that. However again, only in a case where we get a disastrous combination of steep rate increases, high credit fallouts and bank runs, we will get a really big problem. And it is the role of the ECB to avoid that. But we are not there yet and the ECB is taking measures to reassure market participants. But it also needs to maintain its credibility to preserve price stability," she said.
