Banking rebound remains fragile as regulators review response to failures

Investor confidence in the banking sector remained fragile on Tuesday, with the European Central Bank (ECB) saying recent volatility highlighted the need for greater regulatory scrutiny.

European bank stocks weakened slightly, while in the U.S. the S&P 500 banking index rose 0.3%, the S&P 500 regional banking index gained 0.7% and Wall Street banks edged 0.2% to 0.5% higher.

The safe-haven U.S. dollar lost ground against a basket of major currencies for a second day and gold also fell as investors shifted back into riskier assets. Crude oil prices, meanwhile, firmed on the demand outlook as banking fears eased.

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

U.S. House Speaker Kevin McCarthy told CNBC on Tuesday lawmakers should focus on addressing the nation's spending and the debt limit and there was no current for blanket insurance for all bank deposits. "I don't think we need that at this moment in time," he said.

Officials for the U.S. Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and Treasury Department are due to testify before congressional committees on Tuesday.

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

SVB's collapse triggered the worst banking shock since the 2008 crisis, sending bank stocks globally on a wild ride, raising fears of systemic stress and putting central banks and regulators on high alert.

Regional U.S. lender First Citizens BancShares on Monday scooped up the assets of SVB in a sectoral vote of confidence. Shares in First Citizens were last up 5%, hitting a record high after extending gains to a second day.

In Europe, the ECB's top supervisor said a selloff in Deutsche Bank shares last week showed that investors remain nervous and could be spooked by moves in the credit default swap (CDS) market.

Prices for Deutsche Bank's CDS have eased since Friday but remain far above levels prior to the collapse of SVB and the government-orchestrated takeover of Credit Suisse by larger Zurich-based rival UBS.

'VERY OPAQUE'

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

"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."

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 losses caused by "rogue trader" Nick Leeson.

Bailey added that the stresses that led to a crisis in confidence in Credit Suisse were attributable 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, though he added that the sector is in a period of heightened tension.

Senior Bank of Spain officials said uncertainty triggered by the banking sector turmoil may generate a persistent increase in funding costs for Spanish lenders and require a thorough assessment of funding and liquidity sources.

Banks came under scrutiny on another front on Tuesday as French authorities searched the Paris offices of several large institutions including Societe Generale, BNP Paribas and HSBC as part of a widening European investigation into tax payments on dividends.

Societe Generale confirmed the searches. The other banks did not immediately reply to requests for comment.

Mid-sized U.S. lenders, meanwhile, are trying to hang onto customer deposits after the recent bank failures triggered a $119 billion exodus from small institutions.

At a banking conferencea in Las Vegas on Monday, industry executives discussed strategies to bolster customer trust, with higher rates on deposits the most common suggestion.

Though effective in the short term, other strategies could prove more effective in the longer term, some delegates said.

"Trust does not necessarily come from the size of a bank, but more from its profitability and relationships with the community," said Angela Conti, general manager for deposits and retail payments at USAA Federal Savings Bank.