Cautious calm returns to bank stocks as focus shifts to regulation

SINGAPORE (Reuters) – Battered Japanese bank stocks clawed back some of their heavy losses on Wednesday, as regulators and financial executives hosed down investor concerns about contagion after the collapse of Silicon Valley Bank (SVB).

Markets and financial authorities remained on edge, however, with U.S. deposit holders seeking the safety of larger banks amid growing worries about the health of smaller institutions and the prospect of more failures in the sector.

Focus is also shifting to the possibility of tighter regulation in the U.S. banking sector, particularly for mid-tier banks like SVB and New York-based Signature Bank (NASDAQ:), whose collapses last week roiled financial markets.

Some calm had returned to Wall Street on Tuesday, which shored up Asian markets on Wednesday, as volatility fell and bargain hunters began circling the assets of the fallen SVB.

“In the near term we have instilled some stability, but I honestly don’t know if it is stability or the appearance of stability, because I certainly do not know what is occurring behind the scenes at the deposit base of several thousand small to medium sized banks across the United States,” said John Briggs, global head of economics and markets strategy at NatWest Markets.

Japan’s Tokyo Stock Exchange banks index jumped more than 4% on Wednesday, after three straight days of heavy selling and the sharpest drop since the days after the 2011 earthquake and tsunami struck Japan.

Investors had been particularly concerned about the huge bond holdings, particularly in U.S. Treasuries, of Japanese lenders.

However, Japanese finance minister Shunichi Suzuki said on Wednesday differences in the structure of bank deposits, meant local banks wouldn’t face incidents similar to SVB’s collapse.

“Risk sentiment appears to be normalising from the SVB-induced panic,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.

The MSCI Asia ex-Japan Financials Index was last 1% higher, reversing some of Tuesday’s 2% fall.

Bruised U.S. bank stocks had on Tuesday regained some ground following a rough start to the week, aided by news that private equity and buyout giants were looking to scoop up some of SVB’s assets, leaving investors hopeful that efforts to shore up confidence would avert a wider financial crisis.

Apollo Global Management (NYSE:) Inc, Blackstone (NYSE:) Inc and Carlyle Group (NASDAQ:) were among those to have reportedly expressed interest in a book of loans held by SVB.

Meanwhile, Charles Schwab (NYSE:)’s chief executive Walt Bettinger said on Tuesday that the bank has ample liquidity and is not currently seeking capital or deals.

The firm had seen an influx of $4 billion in assets to its parent company on Friday as clients moved assets to Schwab from other firms, Bettinger told Reuters in an interview.

BlackRock Inc (NYSE:) Chief Executive Laurence Fink warned on Wednesday the U.S. regional banking sector remains at risk, though he said that it was not clear whether the banking crisis precipitated by rising interest rates would claim more victims.

SVB’s shutdown on Friday – followed two days later by the collapse of Signature Bank – forced U.S. President Joe Biden to rush out assurances that the financial system is safe and prompted emergency U.S. measures giving banks access to more funding.

In an attempt to avert a similar crisis down the line, the Federal Reserve is also considering tougher rules and oversight for midsize banks similar in size to SVB.

Adding to the Fed’s conundrum, U.S. inflation data out on Tuesday showed few signs of easing in persistent price pressures within the world’s largest economy, putting the bank in a bind on how much further it should take rates to stem inflation without triggering a financial sector shakeout.

“A mixed set of signals leave the Fed more cautious about its next steps and focused on limiting financial contagion,” said Lombard Odier’s chief investment officer Stéphane Monier.

“A year after starting to raise interest rates, the Federal Reserve is still chasing evidence that higher borrowing costs are slowing the U.S. economy.”

In Asia, Vietnam’s central bank made a surprise move by cutting several policy rates on Tuesday, in an attempt to increase liquidity and support economic growth amid the global turmoil caused by SVB’s collapse.

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