Moneycontrol Pro Panorama | Silicon Valley Bank contagion spreads  

As shares of European bank Credit Suisse (CS) Group AG tanked and benchmark bond prices fell, it reignited fears of a full-blown global banking crisis.

Dear Reader,

It’s a perfect storm across asset classes! All efforts by the US Fed to arrest risks to its financial system after a crisis brewed in Silicon Valley Bank (SVB) have come to naught.

On Wednesday, as shares of European bank Credit Suisse (CS) Group AG tanked and benchmark bond prices fell, it reignited fears of a full-blown global banking crisis. Even reports that the bank had secured a $54 billion lifeline to lift investor confidence and prevent a liquidity crisis in the banking system failed to calm markets.

The contagion is spreading across asset classes and regions. Is the Credit Suisse panic related to the failure of Silicon Valley Bank last week? The two businesses are extremely different, and the losses on long-term securities that fatally wounded SVB do not appear to be a problem at CS, says this FT article. But perhaps, in every central bank rate increase cycle, things break, and people get scared, the article points out.

European equity indices closed lower, led by bank stocks that were pummelled. US indices gyrated in sympathy too and closed lower on Wednesday. Asia was sure to feel the heat and Tokyo, Hong Kong, Shanghai, Seoul and Sydney all trended lower, with banks leading the rout on Thursday.

Indian bank shares were no exception and lost sheen, too. This, in spite of them being lauded lately by analysts for sporting relatively healthier balance sheets.

Incidentally, a report by Jefferies India cautions that the CS India connection is more relevant than the SVB one. “It has about Rs 200 billion in assets (12th among foreign banks), presence in derivatives market and funded 60 per cent of assets from borrowings, of which 96 per cent is up to two months,” states the report.

Be that as it may, the contagion is bound to impact global liquidity at a time when central bankers, the world over, were turning more hawkish in order to rein in unabated inflation. But with this banking crisis, Fed chair Jerome Powell’s dilemma is acute as the stability of banks depends on market sentiment even as the Fed’s credibility depends on inflation data, writes Aparna Iyer here.

However, US bond markets turned volatile, as explained in this FT article, as many traders changed their stance overnight, expecting that Fed might pause rate hikes.

Inflation in India, too, is far from contained and fears of the El-Nino impact on commodity prices are emerging, too. How RBI Governor Shaktikanta Das will balance the situation will be known in early April when the Monetary Policy Committee meets. More immediately, all eyes are on the European Central Bank’s rate decision today.

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