March 14 (Reuters) - Silicon Valley Bank's collapse pressured global bank stocks further on Tuesday as investors fretted over the financial health of some lenders, in spite of assurances from U.S. President Joe Biden and other policymakers.
An indicator of credit risk in the euro zone banking system leapt to its highest since mid-July, as worries about contagion risks from the collapse of two U.S. banks compounded investor concerns about the impact on lenders of rising interest rates.
The VIX (.VIX) volatility index, Wall Street's "fear gauge", neared six-month highs overnight, although futures pointed to a modestly higher Wall St open on Tuesday, with U.S. regional banks bouncing in pre-market trading after recent brutal losses.
Banking giants Citi (C.N), Wells Fargo (WFC.N) and JP Morgan (JPM.N) were also 1%-3% higher in the pre-market.
Europe's banking index (.SX7P) fell 0.6% after posting its biggest percentage loss in more than a year on Monday, although some said banks in the region were less vulnerable.
"A critical difference between the European and U.S. systems, which will limit the impact across the Atlantic, is that European banks' bond holdings are lower and their deposits more stable," credit rating agency Moody's said in a note.
Still, shares of embattled Credit Suisse (CSGN.S) fell 4.5% after it said customer "outflows stabilized to much lower levels but had not yet reversed" in its 2022 annual report.
And Britain's HSBC (HSBA.L), which bought SVB's UK arm on Monday, rescuing a key lender for British technology start-ups, slipped 1.4% in its fourth consecutive day of losses.
Asian banking stocks had earlier extended their declines, with Japanese firms hit particularly hard as anxiety about systemic risk sparked a wider rout in markets.
Japanese financial institutions have sufficient capital buffers to absorb losses caused by external factors, including risks caused by SVB's collapse, the Bank of Japan said.
Biden's efforts to reassure markets and depositors came after emergency U.S. measures to shore up banks by giving them access to additional funding failed to dispel investor worries about potential contagion to other lenders worldwide.
"The dramatic collapse of Silicon Valley Bank and widespread market turmoil in the subsequent days is "part of the process" of the world tightening financial conditions after years of cheap money," Morgan Stanley co-president Edward Pick said.
"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 added on Tuesday.
A furious race to reprice interest rate expectations also buffeted markets as investors bet the U.S. Federal Reserve will be reluctant to hike next week.
Traders currently see a 50% chance of no rate hike at that meeting, with rate cuts priced in for the second half of the year. Early last week, a 25 basis point hike was fully priced in, with a 70% chance seen of 50 basis points.
Short-end yields in the euro zone tumbled again as investors bet the European Central Bank would moderate its policy tightening at Thursday's meeting, with chances of a Bank of England hike next week also seen receding.
Antonio Patuelli head of the Italian Banking Association told Il Corriere della Sera he hoped that in the wake of the SVB collapse "the ECB will do more thinking than the already announced decision to raise rates further".
Yunosuke Ikeda, chief equity strategist at Nomura Securities, said the shift to much less aggressive Fed hike expectations has also tempered the outlook for an eventual pivot in Japan away from ultra-low interest rates.
The prospect of higher rates had been "the reason investors have been really excited about Japan bank stocks", Ikeda added.
Analysts say uncertainty continues to dog the financial sector, with investors extremely worried about the health of smaller global banks, the prospect of tighter regulation and a preference to protect depositors at the expense of shareholders.
A wave of customers have applied to shift their accounts to large U.S. banks such as JPMorgan Chase (JPM.N) and Citigroup (C.N) from smaller lenders after SVB's collapse last week, the Financial Times reported on Tuesday.
Major U.S. banks have lost nearly $190 billion since the sell-off began, with regional lenders like First Republic Bank (FRC.N), which plunged more than 60% on Monday, hit hardest.
Biden said on Monday that emergency measures taken by his administration meant Americans would be confident the U.S. banking system is "safe", while also promising stiffer regulation after the biggest U.S. bank failure since the 2008 financial crisis.
OPEN FOR BUSINESS
In a letter to clients, SVB's new CEO Tim Mayopoulos said it was open and conducting business as usual within the United States and expected to resume cross-border transactions in coming days.
"I recognize the past few days have been an extremely challenging time for our clients and our employees," said Mayopoulos, a former CEO of federal mortgage finance firm Fannie Mae who was appointed by the FDIC to run SVB.
U.S. bank regulators sought to reassure nervous customers who lined up outside SVB's Santa Clara, California, headquarters on Monday, offering coffee and donuts.
"Feel free to transact business as usual. We just ask for a little bit of time because of the volume," FDIC employee Luis Mayorga told waiting customers.
Regulators also moved swiftly to close New York's Signature Bank SBNY.O, which had come under pressure in recent days, while Canada's banking regulator took steps to begin daily check-ins with banks that will enable it to monitor their liquidity, The Globe and Mail reported on Monday.
