US President Joe Biden pledged on Monday to do whatever was needed to address a banking crisis threatened by the collapses of Silicon Valley Bank and Signature Bank which forced regulators to step in with emergency measures.
Biden's address came after weekend moves by the United States to guarantee deposits at collapsed tech-focused lender SVB failed to reassure investors about the health of other banks around the world.
Europe's STOXX banking index fell 5.8% on Monday and was on track for its biggest two-day fall since March 2022, soon after Russia invaded Ukraine. Germany's Commerzbank fell as much as 12.7%, while Credit Suisse hit a new record low after falling more than 15%.
Biden said his administration's rapid action over the weekend should give Americans confidence that the US banking system is safe, adding that he was going to ask Congress and regulators to strengthen bank rules.
"Americans can have confidence that the banking system is safe. Your deposits will be there when you need them."
US bank shares had declined in pre-market trading, with Bank of America down 3.7%. Smaller lenders remained under pressure with privately owned First Republic Bank plunging around 60% and PacWest PACW.O down around 40%.
In the money markets, a closely-watched indicator of credit risk in the US banking system edged up, as did other indicators of credit risk in the eurozone. Europe's volatility index jumped to its highest level since October 2022.
Meanwhile, the price of gold raced towards the key $1,900 level, emboldened by bets that the US Federal Reserve may have to tone down its rate hikes as investors sought safe havens.
"There is a sense of contagion and where we see a repricing around financials is leading to a repricing across markets," said Mark Dowding, chief investment officer at BlueBay Asset Management in London.
Dowding said he did not think that a lot of the issues affecting US banks would be present in European lenders.
Bonds held by SVB were "worth next to nothing in a short space of time, so against that backdrop, that has an effect that is translated on a more widespread basis," he added.
US regulators on Sunday stepped in after the collapse of SVB - the largest US bank failure since 2008, which suffered a run after a big hit on a portfolio of bonds.
SVB's customers will have access to all their deposits starting Monday and regulators set up a new facility to give banks access to emergency funds. The Federal Reserve also made it easier for banks to borrow from it in emergencies.
Regulators moved swiftly too to close New York’s Signature Bank SNBY.O, which had come under pressure in recent days. But more stress is expected.
First Republic Bank said on Sunday it had secured additional financing through JP Morgan Chase, giving it access to a total of $70 billion in funds through various sources.
European fallout
In Germany, the central bank convened its crisis team on Monday to assess the possible fallout on the local market, even as no emergency action was foreseen in Europe.
Swiss financial regulator FINMA said it was closely monitoring the situation surrounding failed US lenders and looking for signs of contagion from the banks' collapse.
After marathon talks over the weekend, early on Monday in London HSBC HSBA.L announced it was buying the British arm of SVB for one pound ($1.21). It said Silicon Valley Bank UK had loans of around 5.5 billion pounds and deposits of around 6.7 billion pounds as of March 10.
While SVB UK is small - HSBC's balance sheet exceeds $2.9 trillion - concerns that SVB's failure would cause Britain's start-up industry to seize up had prompted calls from the sector for government to intervene.
Markets gyrate
Meanwhile, a furious race to re-price interest rate expectations also sent waves through markets as investors bet the Fed will be reluctant to hike next week while the mood is febrile and delicate.
Markets are now pricing in a roughly 40% chance that the US central bank will not raise rates at all, according to the CME's Fedwatch tool. Earlier last week a 25 basis point hike was fully priced in, with a 70% chance seen of 50 basis points.
Two-year US Treasury yields were last down 55 bps at around 4.09% US2YT=RR set for their biggest one-day fall since 1987 according to Refinitiv data. SVB's collapse comes alongside the closure of crypto-focused bank Silvergate, which last week disclosed plans to wind down operations and voluntarily liquidate, in the aftermath of FTX's implosion last year.
US banks lost more than $100 billion in stock market value late last week following SVB's failure, while European banks have now lost a similar amount, a Reuters calculation showed.