US financial groups suffered their worst one-day share sell-off for more than two years on Monday and Bank of America fell more than 20 per cent in torrid trading that recalled the depths of the financial crisis.

Regulators convened an emergency conference call of the Financial Stability Oversight Council, which brings together the Federal Reserve, the US Treasury and other agencies. But government officials said there was no evidence of broader systemic instability or institutions’ funding coming under pressure. Banks have been moving to secure longer-term funding in advance of the market turmoil.

But the US downgrade, coupled with continued pessimism over European and American economies, caused widespread selling. Morgan Stanley’s quarterly filing on Monday made explicit reference to the downgrade, warning “it could disrupt payment systems, money markets, long-term or short-term fixed income markets, foreign exchange markets, commodities markets and equity markets and adversely affect the cost and availability of funding”.

BofA shares fell $1.66, or 20.3 per cent, to $6.51 amid concern that the largest US bank by assets might have to raise capital, its problems compounded by a $10.5bn lawsuit from American International Group, alleging the company missold mortgage-backed securities, which the bank denied.

Mike Mayo, analyst at CLSA, told clients that BofA might have to consider selling Merrill Lynch, the broker it acquired during the crisis, and “can no longer rule out a capital raise” because of exposure to mortgage-related losses and litigation.

Banks and, in particular, broker-dealers such as Morgan Stanley, whose shares fell 14.5 per cent, and Goldman Sachs, down 6 per cent, which do not have big deposit bases to fall back on, have taken steps to improve their liquidity in the past few weeks, according to analysts.

Company filings show that Goldman’s weighted average maturity for secured funding exceeded 100 days; Morgan Stanley’s exceeds 120 days – a strengthening that has been under way for some time. Before the crisis, institutions were more reliant on overnight funding and 30-45 day funding in the repurchase, or repo, markets.

Bill Tanona, analyst at UBS, said banks and brokers had been “pushing out terms” further on their funding in recent weeks and were in a far more resilient position in terms of capital, reserves and liquidity than in the run-up to the last crisis. But he added: “When confidence starts to wane …things can be fine today but that can change tomorrow.“

Brad Hintz, analyst at Alliance Bernstein, said: “They are sitting there with a massive amount of cash and a lot of capital. Don’t think this is going to be 2008; it’s not. They have plenty of liquidity to see them through the crisis but it’s still going to be a screw-up.”

The cost of insuring against banks’ default increased by the biggest amount since the failure of Lehman Brothers in 2008. Credit default swaps on BofA widened by 97.37 basis points to 302.57, according to CMA, the data provider. Citigroup’s CDS widened by 54.66bp to 216.45.

Citi said its capital ratios made it “one of the best-capitalised large banks in the world and we have maintained an unequalled liquidity base”.

Get alerts on US banks when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.
Reuse this content (opens in new window)

Comments have not been enabled for this article.

Follow the topics in this article