March 13 (Reuters) - U.S. stock index futures pared early gains on Monday as Silicon Valley Bank's (SVB) collapse hit the banking sector on contagion fears, while bets that the Federal Reserve could pause interest rate hikes in March rose.
The sudden shutdown of SVB Financial (SIVB.O) on Friday following a failed capital raise triggered concerns about risks to other banks from the Federal Reserve's sharpest rate hike cycle since the early 1980s.
Regulators over the weekend stepped in to restore investor confidence in the banking system, saying Silicon Valley Bank depositors will have access to their funds on Monday.
Trading in shares of SVB's peer Signature Bank (SBNY.O) was halted before the bell. First Republic Bank (FRC.N) dropped 61.4% in premarket trading, while Western Alliance Bancorp (WAL.N) fell 26.0%.
Shares of big U.S. banks including JPMorgan Chase & Co (JPM.N), Morgan Stanley (MS.N) and Bank of America (BAC.N) fell between 1% and 5%.
"The situation with SVB reminds people that the era of zero interest rate money is over," said Russ Mould, investment director at AJ Bell.
"Generally speaking, higher interest rates have been seen as a net win because of higher net interest margins. But this is equally a reminder that they can also be sour loan losses that come with a higher interest rate environment and a slower economic environment."
The benchmark S&P 500 (.SPX) tumbled 4.6% last week to mark its biggest weekly percentage decline since September, erasing nearly all of its year-to-date gains.
Traders' bets are currently equally split between a pause or a 25-basis-point rate hike at the Fed's next meeting in March. .
The projections of a terminal rate have also receded to just under 5% by July from around 5.5% earlier.
Goldman Sachs analysts said they no longer expect the Fed to raise rates by 25 basis points at its next policy meeting on March 21-22.
Investors also await crucial inflation data due on Tuesday for more clues on the Fed's monetary tightening plans.
At 6:14 a.m. ET, Dow e-minis were down 84 points, or 0.26%, S&P 500 e-minis were down 2 points, or 0.05%, and Nasdaq 100 e-minis were up 46.5 points, or 0.39%.
