The banking recovery remains shaky as regulators assess the response to failures

On Tuesday, investor trust in the banking sector remained weak, with the European Central Bank (ECB) stating that recent volatility underscored the need for increased regulatory oversight.

After Monday's advances, European bank stocks (.SX7P) stayed steady, while shares in US lenders were indicated higher or flat.

The sanctuary For the second day in a row, the US dollar declined versus a basket of foreign currencies, and gold plummeted as investors returned to riskier assets. Meanwhile, crude oil prices rose on the back of improved demand and easing banking concerns.

Leading US banking regulators said on Monday that, despite recent bank failures, the overall financial system is stable, but that they will evaluate their regulations to prevent future catastrophes.

On Tuesday, officials from the US Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Treasury Department are scheduled to testify before congressional committees.

Politicians, regulators, and central banks have emphasised that the upheaval that has followed the failures of Silicon Valley Bank (SVB) and Signature Bank in the United States this month is not a rerun of the 2008 financial crisis.

In Europe, the European Central Bank's (ECB) chief supervisor said last week's selloff in Deutsche Bank (DBKGn.DE) shares showed that investors are still cautious and might be startled by developments in the credit default swap (CDS) market.

Prices for Deutsche Bank's CDS have fallen since Friday, but remain significantly above levels previous to SVB's demise and the government-sanctioned takeover of Credit Suisse (CSGN.S) by larger Zurich-based rival UBS (UBSG.S).

'VERY OBVIOUS'

“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 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.”

On Monday, regional US lender First Citizens BancShares acquired SVB's assets in a broad vote of confidence that spurred a spike in bank shares.

The failure of SVB produced the largest banking shock since the global financial crisis, sending bank stocks throughout the world into a tailspin, increasing concerns about systemic stress and putting central banks and regulators on high alert.

SVB's implosion, according to Bank of England governor Andrew Bailey, was the fastest since the demise of Britain's Barings Bank in 1995 due to massive derivatives losses generated by "rogue trader" Nick Leeson.

The difficulties that led to a crisis of confidence in Credit Suisse, according to Bailey, were caused by specific issues at 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.

On Tuesday, French officials investigated the Paris headquarters of several prominent banks, including Societe Generale (SOGN.PA), BNP Paribas (BNPP.PA), and HSBC (HSBA.L), as part of a broader European inquiry into dividend tax payments.

Societe Generale confirmed the searches but declined to comment further. Requests for feedback from the other banks were not immediately returned.

A TRUST QUESTION

Nevertheless, mid-sized American lenders are attempting to hold on to customer deposits after previous bank failures caused a $119 billion flight from tiny banks.

On Monday, officials from the banking industry met in Las Vegas to explore how to boost client trust, with higher deposit rates being the most prevalent suggestion.

Although effective in the near term, some delegates believe that other techniques may be more effective in the long run.

“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.

By fLEXI tEAM