Banking Crisis: SVB's Failure Raises Concerns for Regional and Global Banks

Russell Kidson
Mar 27, 2023

Should we be concerned about the future of banking?

On Monday, the purchase of the struggling Silicon Valley Bank (SVB) by a regional U.S. financial institution had a stabilizing effect on European lenders' stock prices. This comes after last week's tumultuous market conditions where concerns about a systemic banking crisis and imminent credit shortages caused significant damage to the industry. The abrupt failure of SVB, which specialized in technology finance, was the most significant banking crisis since the 2008 global financial meltdown, which drew attention from some of the largest European financial institutions.

If authorities can manage the resolution of SVB's failure effectively, it may boost confidence, particularly among the fragile regional banks in the United States. This was reflected in the significant rise in pre-market trading for these banks' stocks. First Citizens BancShares Inc (FCNCA.O) has taken over all of SVB's loans and deposits and granted the Federal Deposit Insurance Corp (FDIC) equity rights in its stock, valued at up to $500 million. In addition, First Citizens will collaborate with the regulator to share losses and provide extra protection against potential credit losses.

As a result, FCNCA.O shares rose by 25% in pre-market trading. The FDIC has estimated that the failure of SVB will cost a federal deposit insurance fund around $20 billion.

According to Susannah Streeter, Head of Money and Markets at Hargreaves Lansdown, the news of First Citizen Bank's intervention has been met with a sense of relief. As one of the largest family-controlled banks in the United States, it has provided a measure of calm to the banking sector. However, Streeter notes that any hope of a significant return to stability may be short-lived.

Related: The state of American banks: Should you be worried?

On Monday, banking stocks in Europe rebounded after a challenging previous session. Germany's largest lender, Deutsche Bank (DBKGn.DE), had suffered an 8.5% decline on Friday, accompanied by a sharp increase in the cost of insuring its bonds against the risk of default. However, the bank's stock rebounded by 5.2% on Monday.

After falling nearly 4% in the previous session, a broader index of Europe's top banks rose 1.4% on Monday. Furthermore, the weekend following the First Citizens deal for SVB marked the first time in several weeks that there was no news of further banking collapses, rescues, or emergency aid from authorities.

Possible time to recuperate strength

The recent failures of SVB and New York-based bank Signature Bank (SBNY.O) have resulted in depositors from smaller regional banks moving their funds to larger banking institutions.

Bloomberg News has reported that U.S. authorities are in the initial stages of discussing the expansion of emergency lending facilities. This could potentially provide First Republic Bank (FRC.N) with additional time to strengthen its balance sheet.

First Republic, whose future has been a subject of investors' concerns, saw a surge of more than 25% in pre-market trading on Monday. Its peers, Western Alliance Bancorp (WAL.N) and PacWest Bancorp (PACW.O), also witnessed an increase in their shares by 5.4% and 9.2%, respectively.

JPMorgan Chase & Co (JPM.N), Citigroup (C.N), and Bank of America (BAC.N) - major U.S. banks - recorded gains ranging between 0.8% and 1.4%. Although the Stoxx index of European bank shares (.SX7P) has fallen by more than 17% this month, and the U.S. KBW regional bank index (.KRX) has lost 20%, investors are still nervous about what the future holds.

‘A combination of carrots, sticks, and acronyms’

The recent spike in tensions for banks has raised concerns regarding whether major central banks will continue to pursue aggressive interest rate hikes to curb inflation and whether tightened lending could negatively impact the global economy.

A U.S. Federal Reserve policymaker highlighted on Sunday that the banking sector's stress is being closely monitored for its potential to trigger a credit crunch. A European Central Bank official also indicated the possibility of a tightening in lending. During a credit crunch, banks reduce the amount they are willing to lend to consumers and businesses due to increased concerns about their customers' ability to repay their loans.

While some localized credit crunches may affect growth without causing a full-scale economic standstill, more substantial lending clamp-downs can impede the economy for years.

Even before the current crisis, bank lending to eurozone companies had decreased for the fourth consecutive month in February, as economic slowdown and increased caution from lenders began to take their toll. However, business morale in Germany, Europe's largest economy, unexpectedly increased in March despite the banking turmoil.

In the United States, where flows into less risky money market funds have risen by over $300 billion in the past month to a record topping $5.1 trillion, focus is on depositors' confidence. The SVB deal may help restore some of that confidence. First Citizens has agreed to take on assets of $110 billion, deposits of $56 billion, and loans of $72 billion while expanding in California. It will also share further potential losses with the FDIC while the FDIC retains approximately $90 billion in securities held for disposal.

Rabobank strategist Michael Every commented that "effectively you're going to get a combination of carrots, sticks, and acronyms to ensure you get the outcome you want and that allows (authorities) to still use interest rates to combat inflation. This seems to be part and parcel of that."

Read further: SVB UK saved from collapse with £1 deal


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  1. Oxa said on March 27, 2023 at 4:35 pm

    Two thumbs up!

  2. John C. said on March 27, 2023 at 3:57 pm

    I’m sorry, but this kind of article has very little to do with technology in the truest sense. It should be left to the news media to cover. I come to this website to learn about actual technology, not for politics and financial news. Please stay on topic.

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