This is not another banking crisis, analysts say — it's 'sentiment contagion' instead

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The collapse of U.S.-based Silicon Valley Bank, the biggest bank failure since the global financial crisis, and the emergency rescue of Credit Suisse by Swiss rival UBS, sparked a sell-off in banking stocks as contagion fears spread.

Deutsche Bank was the next target, with shares plunging and the cost of insuring against its default spiking at the end of last week — despite the German lender's strong capital and liquidity positions.

The market panic appeared to subside Monday after First Citizens agreed to buy a large chunk of failed Silicon Valley Bank's assets. The S&P 500 Banks index climbed 3% on Monday, but remains down 22.5% over March, while in Europe, the Stoxx 600 Banks index closed 1.7% higher Monday but has shed more than 17% this month.

The volatility — at times in the absence of any discernible catalyst — has led market watchers to question whether the market is operating on sentiment rather than fundamentals when it comes to fears of a systemic banking crisis.

«This isn't like Lehman Brothers subject to counterparty risk in complex derivatives during the subprime mortgage crisis,» Sara Devereux, global head of the fixed income group at asset management giant Vanguard, noted in a Q&A Friday.

«The banks in recent headlines had risk management issues with traditional assets. Rapidly rising rates exposed those weaknesses. The banks were forced to become sellers, realizing losses after their bond investments were well below face value.»

She suggested the likes of SVB and Credit Suisse may still be standing today had they not lost the confidence of their clients, evidenced by massive depositor outflows from both banks in recent months.

«It was more of a 'sentiment contagion' rather than the true