By Iain Withers and Lawrence White
LONDON (Reuters) – 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 Edward 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 delegates at the Morgan Stanley European Financial Conference, adding the failures of 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 normalising 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 earlier on Tuesday as worries about potential contagion to other lenders deepened.
The European banking stock index showed signs of stabilising later in later trading, and was down 0.5% at 1106 GMT, while several U.S. banking stocks enjoyed a robust rally at the market open.
The U.S. has taken emergency measures to give banks vulnerable to a run on deposits special access to additional funding, but assurances from 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 the pace of further rate hikes seen likely to weaken some bank balance sheets.
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 U.S. banks including JPMorgan and Citigroup have seen a wave of customers applying to shift their accounts to larger lenders, the Financial Times reported on Tuesday.
(Reporting by Iain Withers and Lawrence White, editing by Sinead Cruise)
