Central banks continue to raise interest rates amid the banking crisis

March 23 (Reuters) – The Bank of England on Thursday followed the Federal Reserve and the Swiss National Bank in raising interest rates, as policymakers continued their fight against inflation in the face of volatility rippling through the global banking system this month.

Investors had questioned whether central banks could continue to tighten policy after the collapse of two U.S. lenders earlier this month sparked turmoil in banks worldwide, trapping one of Europe̵[ads1]7;s biggest banking names in 167-year-old Credit Suisse AG ( CSGN ). S).

After its 11th straight hike, the BoE said it had noted the “large and volatile movements” in financial markets, but that Britain’s banking system remained resilient.

– (Monetary Policy Committee) will continue to closely monitor any effect on the credit conditions facing households and businesses, and hence the impact on the macroeconomic and inflation outlook, it said.

While the recent market turmoil has subsided, it has caused investors to adjust to more challenging economic and lending conditions ahead.

The index of top European banks ( .SX7P ) fell 1.7%, with German banking giants Deutsche Bank ( DBKGn.DE ) and Commerzbank ( CBKG.DE ) down 2.1% and 3.2% respectively. London-headquartered HSBC ( HSBA.L ) fell 2.5%.

Troubled U.S. regional lender First Republic Bank ( FRC.N ) rose 2% in premarket trade after Wednesday’s decline.

Other U.S. banks under the microscope PacWest Bancorp ( PACW.O ), Truist Financial Corp ( TFC.N ) and Western Alliance Bancorp ( WAL.N ) rose between 0.8% and 3%.

Earlier on Thursday, the Swiss National Bank raised its benchmark interest rate by 50 basis points, saying Credit Suisse’s takeover of its Swiss rival UBS ( UBSG.S ) had averted a financial disaster.

Swiss authorities had urged the banks to join forces and offered financial guarantees worth up to 260 billion Swiss francs ($280 billion) to get the deal done.

“At the moment, the focus must be that we can maintain financial stability and that the conclusion of the agreement is smooth and fast,” said SNB chairman Thomas Jordan at a press conference.

BANK BONDS PRESSURE

European central banks raised interest rates a day after the Fed posted another quarter-point increase and Fed Chairman Jerome Powell said stress in the banking industry could trigger a credit crunch with “significant” implications for a slowing US economy.

Citigroup downgraded Europe’s banking sector, warning that the rapid pace of rate hikes will further weigh on economic activity and lenders’ profits.

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

The rescue of Credit Suisse, which followed the collapses of California-based Silicon Valley Bank ( SVB ) ( SIVB.O ) and New York-based Signature Bank ( SBNY.O ), raised broader concerns about investors’ exposure to a fragile banking sector.

Swiss financial market regulator FINMA on Thursday defended its decision to impose heavy losses on some Credit Suisse bondholders as part of the bailout, saying the move was legally watertight.

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

The convertible bonds were designed to be called upon during bailouts to prevent the costs of bailouts from falling on taxpayers as happened during the 2008 global financial crisis.

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

Steep falls in bank shares after Credit Suisse’s AT1 bondholders were written off prompted European regulators to rush to defend the crisis-fighting tool.

Asian policymakers are also trying to calm investor nerves around AT1 bonds, but the ongoing turbulence is likely to keep a lid on new debt sales.

The central banks of Hong Kong and Singapore said they would stick to the traditional hierarchy of creditor claims should a bank collapse in their respective jurisdictions.

However, the volatility could prompt at least two Japanese banks, Mitsubishi UFJ Financial Group ( 8306.T ) and Sumitomo Mitsui Financial Group ( 8316.T ), to put the AT1 issue on hold, two sources told Reuters.

Politicians from Washington to Tokyo have stressed that the turmoil is different from the crisis of 15 years ago, saying banks are better capitalized and funds more readily available.

However, some observers warn that the banking system is more vulnerable to rumors and rapid movements in an era of widespread use of social media, posing a challenge to regulators trying to curb volatility.

Social media is a “complete game changer” in banking, Citigroup Inc ( CN ) CEO Jane Fraser told the Economic Club of Washington DC on Wednesday.

($1 = 0.9280 Swiss francs)

Reporting by Reuters agencies; Written by Toby Chopra Editing by Tomasz Janowski

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