Following a turbulent 10 days, culminating in the 3 billion Swiss francs ($3.2 billion) Swiss-regulator-engineered takeover of Credit Suisse by its rival UBS, the attention has now shifted to this week's meeting of the U.S. Federal Reserve (Fed).
On Tuesday, investors stepped cautiously into bank stocks, encouraged by the historic merger. Although share prices tentatively rose in Europe and Asia, concerns persist about potential further damage to credit markets and smaller U.S. lenders.
The question among traders and investors is whether Fed's relentless rate hikes, which some have blamed for sparking the biggest meltdown in the banking sector since the global financial crisis, might end.
"The current situation in U.S. regional banks and Credit Suisse has raised concerns about contagion risk," said Grace Tam, chief investment adviser Hong Kong at BNP Paribas Wealth Management, adding near-term sentiment remains volatile.
The demise of 167-year-old Credit Suisse was triggered by the collapse of U.S. mid-sized lenders Silicon Valley Bank (SVB) and Signature Bank. In addition, investors are concerned about potential bombs ticking elsewhere in the financial system.
Switzerland's Bankers Association said on Tuesday that credit supply in the country will not be restricted by the demise of Credit Suisse, adding it was convinced the Swiss banking sector still had a "prosperous future."
Credibility "is not destroyed, but it's not good," the association's head, Marcel Rohner, told a news briefing.
Asian shares lifted off their lows as the move assuaged the worst fears of systemic contagion in the financial system, while European bank shares also opened slightly higher.
"This time, major central banks have reacted swiftly to backstop liquidity. U.S. officials are also studying ways to guarantee all bank deposits if the banking crisis expands temporarily," Tam said.
In a sign of business continuity, Credit Suisse kicked off its three-day annual Asian Investment Conference in Hong Kong, which draws top executives at regional companies, among others.
But Credit Suisse CEO Ulrich Koerner, who was expected to attend, dropped out, and the event was closed to the media.
'Near-death experience'
Policymakers from Washington to Europe have repeatedly stressed that the current turmoil differs from the global financial crisis 15 years ago, pointing to banks being better capitalized and funds more readily available.
But the sudden shock means traders have increased their bets; the Fed will pause its hiking cycle on Wednesday to ensure financial stability, although they remain split over whether the Fed will raise its benchmark policy rate.
"The banking sector's near-death experience over the last two weeks is likely to make Fed officials more measured in their stance on the pace of hikes," said Standard Chartered's head of G10 FX research, Steve Englander.
Top central banks promised to provide dollar liquidity to stabilize the financial system at the weekend to prevent the banking jitters from snowballing into a more significant crisis.
In a global response not seen since the height of the pandemic, the Fed said it had joined central banks in Canada, Britain, Japan, the eurozone, and Switzerland in a coordinated action to enhance market liquidity.
Meanwhile, JPMorgan Chase & Co CEO Jamie Dimon is leading talks with other big banks on new efforts to stabilize First Republic Bank, which last week had a $30 billion capital infusion, the Wall Street Journal reported.
A spokesperson for First Republic pointed to an earlier statement where the bank said it was "well-positioned to manage short-term deposit activity."
Wall Street's S&P 500 banks index inched up on Monday, and other regional U.S. banks rose. PacWest Bancorp was up almost 11% after saying deposit outflows had stabilized and its available cash exceeded total uninsured deposits.
In Europe, the investor focus has shifted to the massive blow some Credit Suisse bondholders will take, prompting eurozone and U.K. banking supervisors to try to stop a rout in the market for convertible bank bonds.
The regulators said owners of this type of debt would only suffer losses after shareholders have been wiped out – unlike Credit Suisse, whose central regulators are in Switzerland.
Lawyers are talking to several AT1 bondholders about possible legal action, law firm Quinn Emanuel Urquhart & Sullivan said on Monday.
Danske Bank has advised its private clients not to invest in high-yield bonds, citing the risk of substantial capital losses as credit conditions tighten.
The category of high-yield bonds includes corporate and bank bonds, including the AT1 bonds that Credit Suisse will have to write down to zero on the orders of the Swiss regulator as part of the bank's rescue merger with UBS.