US and European bank stocks tumble as investors fret over SVB fallout

US and European bank stocks dropped on Monday and traders raced into sovereign debt, as markets fretted over regulators’ moves to prevent the collapse of Silicon Valley Bank from spreading into the wider economy.

The KBW Nasdaq Bank Index fell 10 per cent by early afternoon trading in the US and the European Stoxx banking index was down 5.8 per cent as investors worried about the value of banks’ bond portfolios.

Traders flocked to sovereign debt as jitters spread through the market following regulators’ moves over the weekend to insulate customers from the failure on Friday of California-based SVB and its UK arm.

The yield on the two-year US Treasury note, which is sensitive to interest rate changes, fell 0.46 percentage points to 4.12 per cent — its biggest single-day drop since 1987. German 10-year Bunds fell 0.2 percentage points to 2.26 per cent. Yields fall when prices rise.

“This is how asset cycles end, and now it converts to a credit crunch and the economy will move towards recession,” said Steven Blitz, chief US economist at TS Lombard. “All the shareholders and depositors are nervous, so what are you going to do? Expand your loan book? No, they’ll put cash and deposits back with the [Federal Reserve].”

Among US bank shares, Bank of America lost 2.5 per cent and Citigroup fell 5.9 per cent. In Europe, Credit Suisse shed 9.6 per cent and Commerzbank lost 12.5 per cent. The UK’s Virgin Money fell 8.9 per cent.

Neil Shearing, group chief economist at Capital Economics in London, said: “There’s a sense where markets are thinking that the Federal Reserve stepped in aggressively to stop problems spreading, but that doesn’t apply in Europe . . . cracks are starting to appear and it’s a reminder that if rates go up that could cause problems for [banking] institutions.”

The declines in some of the biggest bank shares pushed benchmark indices in Europe lower, with the Stoxx 600 closing down 2.3 per cent. However, broader US markets were more assured by afternoon trading, with the blue-chip S&P 500 up 0.2 per cent and the tech-heavy Nasdaq Composite gaining 0.8 per cent. Investors were assured by US regulators saying the bank’s depositors would be fully repaid in their attempt to shore up the banking system.

Meanwhile, small cap stocks were hit particularly hard, with the Russell 2000 Index losing 1.3 per cent.

Investors are now increasing bets that the US central bank will leave interest rates unchanged following the failure of three banks — SVB, Silvergate and Signature — in the last week. Investors had been pricing in a 0.5 percentage point rise after comments last week by Fed chair Jay Powell.

On Tuesday US consumer price index numbers will be released, the latest in a series of key data releases which will provide investors with clues as to the pace of the economy and probable interest rate rises.

“Until now we’ve had very little case against the Federal Reserve’s hawkish stance,” said Mobeen Tahir, director of macroeconomic research and tactical solutions at WisdomTree Europe. “This [Silicon Valley Bank’s collapse] is the first real development to challenge that.”

London’s FTSE 100 fell 2.5 per cent after the UK government confirmed that the UK unit of SVB would be sold to HSBC. The CAC 40 in Paris fell 2.9 per cent.

Oil also fell, with Brent crude falling 1.8 per cent to $81.30 per barrel and WTI, the US equivalent, dropping 1.9 per cent to $75.23 per barrel.

The dollar dropped 0.9 per cent against a basket of other currencies during morning trading. The pound rose 1 per cent against the dollar.

Equities in Asia were mixed. Japan’s Topix lost 1.5 per cent while Hong Kong’s Hang Seng index rose 2 per cent and mainland China’s CSI 300 rose 1.1 per cent on Monday.

At an annual session of parliament on Sunday, China announced it was keeping the head of the central bank and finance minister in their posts. The country’s credit growth in February was also higher than expected, bolstering economic recovery hopes.

Shanghai Pudong Development Bank, which owns a stake in a joint venture with Silicon Valley Bank’s China unit, lost 1.3 per cent.