Europe's bank stocks weakened slightly on Wednesday, after Japanese peers clawed back some of their heavy losses, as regulators and financial executives hosed down contagion concerns after last week's Silicon Valley Bank collapse.
Markets and financial authorities remained on edge, however, with US deposit holders seeking the safety of larger banks amid growing worries about the health of smaller institutions and the prospect of more failures in the sector.
However, European Central Bank policymakers are still leaning towards a half-percentage-point rate hike on Thursday, despite turmoil in the banking sector, as they expect inflation will remain too high in coming years, a source told Reuters.
Investors had begun to doubt the ECB's commitment to another big rate hike this week after the collapse of Silicon Valley Bank (SVB) in the United States sent shockwaves across markets.
But the source, who is close to the Governing Council, said the ECB was unlikely to ditch its plan to raise rates by 50 basis points on March 16 - announced at its last meeting and repeated several times by President Christine Lagarde and her colleagues - because that would damage its credibility.
A number of gauges of financial market stress retreated on Wednesday, reflecting the greater sense of calm across most asset classes since US authorities stepped in to stem any further turmoil in the banking system.
One indicator often used as a measure of banking sector stress, the so-called FRA/OIS spread, dropped to around 2 basis points, from closer to 21 bps the day before. The higher the spread goes, the greater the perception of stress in the market.
In the United States, the focus is shifting to the possibility of tighter regulation of banks, particularly mid-tier ones such as SVB and New York-based Signature Bank, whose collapses roiled financial markets.
Moody's Investors Service on Tuesday revised its outlook on the US banking system to "negative" from "stable", citing heightened risks for the sector.
Some calm returned to Wall Street on Tuesday, shoring up Asian markets. The VIX volatility index, often called "Wall Street's fear gauge", has retraced some 70% of the rise from March 9 to highs above 30% on Mar 13, while short-dated government bond yields are rising towards last week's level.
"In the near term we have instilled some stability, but I honestly don't know if it is stability or the appearance of stability, because I certainly do not know what is occurring behind the scenes at the deposit base of several thousand small to medium sized banks across the United States," said John Briggs, global head of economics and markets strategy at NatWest Markets.
Japan's Tokyo Stock Exchange banks index jumped more than 4%, after three straight days of heavy selling and the sharpest drop since the days after the 2011 earthquake and tsunami struck Japan.
Investors had been particularly concerned about the huge bond holdings, particularly US Treasuries, of Japanese lenders.
However, Japanese finance minister Shunichi Suzuki said on Wednesday differences in the structure of bank deposits meant local banks wouldn't face incidents similar to SVB's collapse.
"Risk sentiment appears to be normalising from the SVB-induced panic," said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.
The MSCI Asia ex-Japan Financials Index was last 1% higher, reversing some of Tuesday's 2% fall.
Bruised US bank stocks had on Tuesday regained some ground, aided by news that private equity and buyout giants were looking to scoop up some of SVB's assets, leaving investors hopeful that efforts to shore up confidence would avert a wider financial crisis.
Apollo Global Management Inc, Blackstone Inc and Carlyle Group were among those to have reportedly expressed interest in a book of loans held by SVB.
Separately, SVB Financial Group said on Tuesday that Goldman Sachs Group Inc was the acquirer of a bond portfolio on which it booked a $1.8 billion loss, a transaction that set in motion the failure of SVB.
Meanwhile, Charles Schwab Chief Executive Walt Bettinger said on Tuesday that the bank has ample liquidity and is not currently seeking capital or deals.
The firm had seen an influx of $4 billion in assets to its parent company on Friday as clients moved assets to Schwab from other firms, Bettinger told Reuters.
SVB's shutdown on Friday - followed two days later by the collapse of Signature Bank - forced President Joe Biden to rush out assurances that the US financial system is safe and prompted emergency measures giving banks access to more funding.
In an attempt to avert a similar crisis down the line, the Federal Reserve is also considering tougher rules and oversight for midsize banks similar in size to SVB.
Adding to the Fed's conundrum, US inflation data out on Tuesday showed few signs of easing in persistent price pressures within the world's largest economy.
"A mixed set of signals leave the Fed more cautious about its next steps and focused on limiting financial contagion," said Lombard Odier's chief investment officer Stéphane Monier.