SVB a casualty in 'battle between fire and ice' against inflation, bankers hear

The dramatic collapse of Silicon Valley Bank and the market turmoil it unleashed is part of the "battle between fire and ice" in global efforts to curb inflation after years of cheap money, Morgan Stanley co-president Ted Pick said on Tuesday.

Steep rises in interest rates by the Federal Reserve and other central banks to combat soaring consumer prices had inevitably led to flare-ups of stress, Pick told the Morgan Stanley European Financials Conference, adding that failed US lenders SVB and Signature Bank were casualties of this.

 

"This is part of the process of the knob being turned to tighten financial conditions to make sure that we are on our way to normalizing a higher interest rate world," Pick said.

"But there might well be surprises, there might well be reactions," he said, adding the market was around halfway through a fight to "slay inflation" that would be waged over 12 to 18 months.

Shockwaves from the collapse of SVB put fresh pressure on bank stocks across Asia and Europe on Tuesday as worries about potential contagion to other lenders deepened.

 

But the European banking stocks index (.SX7P) later showed signs of stabilizing, and was up 0.5 percent at 1203 GMT, while several US banking stocks looked set to rebound in pre-market trading.

The United States has taken emergency measures to give banks vulnerable to a run on deposits special access to additional funding, but assurances from US President Joe Biden and other policymakers have so far done little to calm markets.

 

Investors and analysts are now forecasting tweaks to global interest rate policies designed to bring runaway inflation under control, with a rapid pace of further rate hikes seen as likely to weaken some bank balance sheets.

Morgan Stanley's Pick said the events of the last week may give the Federal Reserve pause for thought on its own rate plans. He was speaking ahead of closely-watched US inflation data later in the day. read more

Lloyds chief executive Charlie Nunn earlier told the event that British banks were not yet seeing a "flight to quality" in deposits among customers nervous about the safe-keeping of their money following the collapse of SVB.

Major US banks including JPMorgan (JPM.N) and Citigroup (C.N) have seen a wave of customers applying to shift their accounts to larger lenders, the Financial Times reported on Tuesday.

Analysts at Goldman Sachs said in a note on Monday that US banking stresses could spread directly to European banks.

Santander was described as the only institution with "significant exposure" to US deposit holders, with about 12 percent of total deposits in the United States, while HSBC had 6 percent and Barclays had 8 percent in the Americas as a whole, the research said.