The worst may not have happened. The failures of Silicon Valley Bank and Signature Bank continue to affect the stock markets and have caused a new shock to the global banking system.
There was a rally in the stock market on Tuesday, which followed assurances from the Biden administration that corporate depositors of failed banks would have their assets restored.
“The S&P 500 rose 1.5 percent in morning trading, recouping some of its losses from the rapid collapse of Silicon Valley Bank and Signature Bank, and pointing to a semblance of stability returning to financial markets.” the Times reported. “Investors appeared to take to heart assurances that depositors will be protected by federal authorities, helping to calm nerves in the banking sector.”
“First Republic Bank, one of the banks most in the spotlight for investors in recent days, rose nearly 50 percent, after falling a similar amount on Monday,” the Times added. “Western Alliance Bancorp rose about 40 percent, after falling nearly 50 percent. The KBW Bank Index, which tracks the performance of 24 banks, rose more than 4 percent, its best day in about four months.”
But those gains are in danger of being reversed as Wednesday saw the return of bank fears.
“Stock markets fell on Wednesday as investor fears about the health of the banking sector resurfaced and spread around the world, undoing a rally on Tuesday when panic appeared to have stalled,” the Times reported .
“On Wall Street, the S&P 500 fell 1.6 percent in open trade, reversing all of the previous day’s gains,” the Times added. “European markets were also hit hard, with shares of many of the region’s biggest banks falling sharply as anxiety lingers over the fallout from the collapse of Silicon Valley Bank and Signature Bank, which were seized by regulators after suffering devastating increases in deposits.”
One victim of banking contagion is Credit Suisse, which has failed to secure Saudi support for its depleted deposits.
“Shares of Credit Suisse fell 21% on Wednesday after its Saudi backers scrapped more investments,” Markets Insider reported. “The embattled Swiss bank revealed ‘material weaknesses’ in its report on Tuesday. Shares in the pan-European Stoxx 600 index also fell in Europe, prompting trading halts.”
Saudi National Bank President Ammar Al Khudairy said in an interview with Bloomberg that he would not come to Credit Suisse’s aid.
“The answer is absolutely no, for many reasons apart from the simplest one, which is regulatory and statutory,” remarked Al Khudairy.
Silicon Valley Bank and Signature Bank do not have the same risk exposures as Credit Suisse, which has a history of management problems.
But analysts at S&P Global Ratings said Tuesday of the global banking system that “the failure of SVB has shaken confidence.”
The failures of SVB and Signature Bank also present a unique challenge for the Federal Reserve Bank as it continues to curb underlying inflation with rate hikes while maintaining significant liquidity to prevent the US economy from contracting important economic
On Tuesday, the Consumer Price Index report indicated that while inflation remains high, it has eased significantly from last year’s month-to-month highs.
“The consumer price index, a closely watched gauge of inflation, rose 6% in February from a year earlier, down from a 6.4% increase in the previous month,” it reported The Wall Street Journal, citing the Department of Labor. “It was the smallest increase since September 2021. Excluding volatile food and energy costs, prices advanced a slightly slower 5.5%. Economists see so-called core prices as a better indicator of future inflation.”
As the WSJ reported, encouraging economic news had helped spur a temporary gain in stock markets.
“The S&P 500 rose 1.68%, the Dow Jones Industrial Average added about 1% and the tech-focused Nasdaq Composite rose 2.14%,” the WSJ noted. “The yield on the benchmark 10-year Treasury note rose 0.118 percentage points to 3.633%.
“Elevated inflation, combined with a strong labor market and solid consumer spending, appeared to put the Fed in a position to consider a bigger increase in interest rates at its next meeting,” the WSJ continued. “But the collapse of Silicon Valley Bank and other financial institutions could lead the central bank to act more cautiously in assessing the health of the financial system.”
The shocks to the banking system come as the Federal Reserve Bank seeks to expand its oversight of alternative cryptocurrency markets. The collapses of SVB and Signature Bank have fueled volatility in crypto markets, as the former bank in particular held deposits for crypto companies and exchanges, such as BlockFi. However, the crypto market has proven to be quite resilient, despite the volatility.
The Federal Reserve Bank has been exploring the development of central bank digital currency (CBDC). So far, 11 nations have implemented CBDCs, according to the Atlantic Council’s tracker.
The World Economic Forum supports the implementation of CBDC to promote more “inclusion” in the global digital economy.
It quotes the US central bank, the Federal Reserve, as saying that if CBDCs were introduced, it would be “the safest digital asset available to the general public, with no associated credit or liquidity risk.”
“The resilience of financial systems could also be increased,” WEF adds. “If a natural disaster or the failure of a payments company made cash unavailable, a CBDC could provide a backup, says the International Monetary Fund.”
More than 100 countries, including 19 G20 nations, are now exploring central bank digital currencies (CBDCs), the World Economic Forum noted.
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