Banking volatility eases as regulators refine responses

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Immediate investor concerns over the banking sector eased on Tuesday, lifting stock prices, with the European Central Bank’s supervisory chief saying recent sector volatility underscored the need to step up regulatory scrutiny.

European banks (.SX7P) were up 1.2%, adding to Monday’s 1.4% gain, with UBS (UBSG.S) 1.6% higher after its CEO said the Swiss bank sees its government-orchestrated Credit Suisse takeover as a growth opportunity. Credit Suisse (CSGN.S) shares rose 1.7%.

The safe-haven U.S. dollar, meanwhile, lost ground against a basket of major currencies for a second day, while the price of gold also fell as investors shifted back into riskier assets.

Top U.S. banking regulators said on Monday they planned to tell Congress that the overall financial system remains on a solid footing after recent bank failures, but will comprehensively review their policies in a bid to prevent future collapses.

Policymakers, regulators and central banks have emphasised how the banking sector turmoil which followed this month’s collapse in the United States of Silicon Valley Bank (SVB) and Signature Bank is not a repeat of the 2008 financial crisis.

Top regulatory officials for the Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and Treasury Department are testifying before congressional committees on Tuesday.

In Europe, in the wake of a sell-off in Deutsche Bank (DBKGn.DE) shares last week, the ECB’s top supervisor said he was concerned as it showed investors were on edge and could be spooked by moves in the credit default swap (CDS) market.

VERY OPAQUE

“What concerned me really was the amount of nervousness (and) disquiet that I perceived in the market and among investors,” Andrea Enria told a conference in Frankfurt.

“There are markets like the single-name CDS market which are very opaque, very shallow and very illiquid and with a few million (euros) the fear spreads to the trillion-euro-assets banks and contaminates stock prices and also deposit outflows.”

Regional U.S. lender First Citizens BancShares on Monday scooped up the assets of SVB, in a vote of confidence for the battered banking sector that prompted a rally in bank shares.

SVB’s collapse was the trigger for the worst banking shock since the global financial crisis, sending bank stocks globally on a wild ride, raising fears of systemic stress and putting central banks and regulators on high alert.

Bank of England governor Andrew Bailey said SVB’s collapse had been the fastest since the demise in 1995 of Britain’s Barings Bank after huge derivatives losses caused by “rogue trader” Nick Leeson.

Bailey said the stresses which led to a crisis in confidence in Credit Suisse were down to specific issues in Switzerland’s second-largest bank.

“I don’t think that any, and we’ve said this, that any of these features cause stress in the UK banking system,” Bailey told parliament’s Treasury Committee.

“We are in a period in very heightened, frankly, tension and alertness,” Bailey added.

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