Two major banks in Europe look to regulators to stem contagion risk

“At least two major banks in Europe are examining scenarios of contagion in the region's banking sector and are looking to the Federal Reserve and the ECB for stronger signals of support,” two senior executives close to the discussions told Reuters.

“The fallout from the crisis of confidence in Credit Suisse Group AG and the failure of two U.S. banks could ripple through the financial system next week, the two executives separately told Reuters on Sunday,” reported Reuters.

The news also quotes the two anonymous people saying that the two banks have held their internal deliberations on how soon the European Central Bank should weigh in to highlight banks' resilience, specifically their capital and liquidity positions, per Reuters.

Key quotes

A focus of these internal discussions is whether such statements might create even more alarm if they are made too soon.

The executives said their banks and the sector are well capitalized and their liquidity is strong, but they fear the crisis of confidence will sweep up more lenders.

One of the executives said the Federal Reserve might have to move first as the failures of Silicon Valley Bank and Signature Bank in the United States earlier this month triggered concerns in Europe.

A third executive at another major European bank separately told Reuters they thought the ECB would be reluctant to make a public statement before markets reopen, questioning whether they would judge it necessary at this time and adding that the main focus was still on talks in Switzerland.

In a sign of further strain, a coalition of midsize US banks, Mid-Size Bank Coalition of America (MBCA), has asked regulators to extend FDIC insurance to all deposits for the next two years, Bloomberg News reported on Saturday citing an MBCA letter to regulators.

The letter said that extending insurance will stop the exodus of deposits from smaller banks, in turn helping to stabilize the banking sector.

Market implications

The news joins the pre-Fed anxiety to tame the market’s risk-on mood, which in turn allows the risk-barometer pair AUD/USD to grind higher past 0.6700, around 0.6715 by the press time.

Also read: AUD/USD grinds higher past 0.6700 on Credit Suisse news, comments from RBA’s Kent, Fed eyed