Notwithstanding the banking crisis, central banks continue to raise interest rates

The Bank of England raised interest rates on Thursday, following the Federal Reserve and the Swiss National Bank, as officials continued to fight inflation in the face of the global financial system's volatility this month.

Investors had questioned whether the central banks could press on with tightening policy after the collapse of two US lenders earlier this month triggered turmoil in banks around the globe, ensnaring one of Europe’s biggest banking names in 167-year-old Credit Suisse AG (CSGN.S).

Following its eleventh consecutive hike, the Bank of England stated that it had observed "large and volatile moves" in financial markets, but that Britain's banking system remained resilient.

“The (Monetary policy committee) will continue to monitor closely any effect on the credit conditions faced by households and businesses, and hence the impact on the macroeconomic and inflation outlook,” it said.

While recent market jitters have subsided, they have prompted investors to prepare for more difficult economic and lending conditions in the future.

The index of leading European banks (.SX7P) fell 1.7%, with German banking behemoths Deutsche Bank (DBKGn.DE) and Commerzbank (CBKG.DE) plunging 2.1% and 3.2%, respectively. HSBC (HSBA.L), headquartered in London, fell 2.5 percent.

Troubled US regional lender First Republic Bank (FRC.N) rose 2 per cent in premarket trading after slumping on Wednesday.

Other US banks under scrutiny were PacWest Bank (PACW.O), Truist Financial Corp (TFC.N), and Western Alliance Bancorp (WAL.N), which all rose between 0.8% and 3%.

Earlier on Thursday, the Swiss National Bank hiked its key interest rate by 50 basis points and declared that Credit Suisse's takeover by Swiss rival UBS (UBSG.S) had averted a financial disaster.

Swiss authorities urged the banks to collaborate and offered financial guarantees totaling up to 260 billion Swiss francs ($280 billion) to complete the transaction.

“At this moment the focus has to be that we can maintain financial stability and that the closing of the deal is smooth and fast,” SNB Chairman Thomas Jordan told a news conference.

BOND PRESSURE IN BANKS

The European central banks boosted rates a day after the Fed raised rates by a quarter point, with Fed Chair Jerome Powell warning that banking industry stress may lead to a credit crisis with "significant" consequences for the US economy.

Citigroup downgraded Europe’s banking sector, warning the quick pace of interest rate hikes will further weigh on economic growth and lenders’ earnings.

“The European banking sector’s fundamentals look healthy. But the ongoing confidence crisis could limit banks’ risk appetite and reduce the flow of credit,” Citigroup equity strategists said.

Following the failures of California-based Silicon Valley Bank (SVB) (SIVB.O) and New York-based Signature Bank (SBNY.O), the rescue of Credit Suisse sparked broader concerns about investors' exposure to a fragile banking sector.

The Swiss financial market regulator FINMA defended its decision to impose steep losses on some Credit Suisse bondholders as part of its rescue on Thursday, saying the move was legally sound.

The decision to prioritise shareholders over Additional Tier 1 (AT1) bondholders rattled the $275 billion AT1 bond market and some Credit Suisse AT1 bondholders were seeking legal advice.

The convertible bonds were intended to be used during rescues to prevent bailout costs from being passed on to taxpayers, as happened during the 2008 global financial crisis.

“The AT1 instruments issued by Credit Suisse contractually provide that they will be completely written down in a ‘viability event’, in particular if extraordinary government support is granted,” FINMA said.

Steep falls in banking stocks after the wipeout of Credit Suisse’s AT1 bondholders prompted European supervisors to rush to defend the crisis-fighting tool.

Asian officials are also working to assuage market fears about AT1 bonds but the prolonged turmoil is likely to keep a lid on additional debt sales.

Hong Kong and Singapore central banks stated they would keep to the conventional hierarchy of creditor claims if a bank was to collapse in their respective countries.

According to two sources, the volatility may push at least two Japanese banks, Mitsubishi UFJ Financial Group (8306.T) and Sumitomo Mitsui Financial Group (8316.T), to halt AT1 issuance.

Policymakers from Washington to Tokyo have stressed the turmoil is different from the crisis 15 years ago, saying banks are better capitalised and funds more easily available.

Yet, some experts worry the banking sector is increasingly subject to rumour and quick changes in an era of broad social media use, providing a challenge for authorities trying to tamp down instability.

Citigroup Corp (C.N) CEO Jane Fraser told the Economic Club of Washington D.C. on Wednesday that social media is a "total game changer" in bank runs.

By fLEXI tEAM