The startup-focused lender became the largest bank to fail since the 2008 financial crisis last week, sending shockwaves across global markets.

U.S. regulators stepped in over the weekend to guarantee the deposits of SVB, but this did little to reassure investors that there will be no more fallout.

Investors reeled in their expectations for global central bank rate hikes, and bank stocks tumbled once again.

In the money markets, a closely watched indicator of credit risk in the U.S. banking system edged up on Monday, as did other indicators of credit risk in the euro zone.

The so-called FRA-OIS spread, which measures the gap between the U.S. three-month forward rate agreement and the overnight index swap rate, edged to its widest since Feb. 21, to 11.4 basis points. This spread is widely seen as a proxy for banking sector risk and a higher reading reflects rising interbank lending risk.

"It'd be unrealistic to think that banks aren't being more discerning about who they're going to lend money to," said Lyn Graham-Taylor, senior rates strategist at Rabobank.

    "It's relatively contained in the U.S., but of course, there's going to be stresses in the banking system when people are looking at each other's business models, wondering if anyone's got an issue," Graham-Taylor said.

U.S. banking stocks came under fire in early trading. An index of major bank shares dropped 8.3%, its largest one-day fall since the onset of the COVID-19 crisis in March 2020.

"If banks start to be more cautious and credit standards tighten a lot more, that drives more risk of recession down the road," Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, said.

"The more immediate risk is from the U.S., but in both (regions) we have quarterly surveys that show banks are already planning to tighten credit standards. Now we have more risk that this tightening becomes disorderly at some point," he said.

European banks were heading for their largest one-day slide in a year as well, down almost 10%.

Euro swap spreads, another risk gauge, widened sharply.

The gap between two-year euro swap rates and two-year German bond yields widened by around 20 basis points to 83 basis points, to the highest since Nov. 11.

Analysts said that was a result of strong demand for safe-haven bonds.

A swap spread measures the premium on the fixed-leg of an interest rate swap, used by investors to hedge against rates risk, relative to bond yields.

Graphic: Signs of stress - https://www.reuters.com/graphics/MARKETS-SWAPS/gkplwlrmxvb/chart.png

In Germany, two-year bond yields dropped more than 50 basis points, much more than a drop of 37 basis points on swap rates.

Cross-currency basis swaps, a measure of non-U.S. investor demand for the dollar, another safe-haven, reached their widest in nearly five months.

Three-month euro swaps reached minus 34 bps, the most since late October.

As dramatic as some of the moves in bond and stock prices were on Monday, analysts agreed that it was unlikely to be a function of direct contagion from SVB, but rather, more driven by sentiment.

    "This move we're seeing right now is more of a stress indication than anything else," Piet Christiansen, chief analyst at Danske Bank, said.

Graphic: Seismic shift in Fed expectations - https://www.reuters.com/graphics/MARKETS-FUTURES/egpbyorzdvq/chart.png

(Additional reporting by Naomi Rovnick; Editing by Hugh Lawson and Sharon Singleton)

By Amanda Cooper and Yoruk Bahceli