As banking sector confidence falters, central banks called on to do more

Some investors and analysts are calling for more coordinated interventions from central banks to restore financial stability, as they fear that tumult in the global banking sector will continue amid rising interest rates.

After the collapse of two U.S. lenders this month and last weekends Swiss-government-orchestrated takeover of troubled Credit Suisse markets have remained jittery. On Friday, shares of Deutsche Bank (ETR:DBKGn) plunged amid concerns that regulators and central banks have yet to contain the worst shock to the banking sector since the 2008 global financial crisis.

Global central banks including the Federal Reserve have recently taken measures to enhance the provision of liquidity through the standing U.S. dollar swap line arrangements. At the same time, however, both the European Central Bank (ECB) and the Fed have continued to hike rates over the past two weeks, as they remain dead set on fighting stubbornly high price pressure.

For Erik Nielsen, group chief economics advisor at UniCredit in London, central banks should not separate monetary policy from financial stability at a time of heightened fears that banking woes could lead to a widespread financial crisis.

“Major central banks, including the Fed and the ECB, should make a joint statement that any further rate hike is off the table at least until stability has returned to the financial markets,” he said in a note on Sunday. “Statements like these within the next few days would most likely be needed to take us away from the brink of a much deeper crisis,” he said.

was prepared to repeat actions taken in the Silicon Valley and Signature Bank (NASDAQ:SBNY) failures to safeguard uninsured bank deposits if failures threatened more deposit runs.

Still, Fed data on Friday showed deposits at small U.S. banks dropped by a record amount following the collapse of Silicon Valley Bank on March 10.

Meanwhile, overall deposits in the banking sector have declined by almost $600 billion since the Fed began to raise interest rates last year, the biggest banking sector deposit outflow on record, noted Torsten Slok, chief economist at Apollo Global Management (NYSE:APO).

“The near-term risks to banks combined with uncertainty about deposit outflows, bank funding costs, asset price turbulence, and regulatory issues, all argue for tighter lending conditions and slower bank credit growth over the coming quarters,” he said.