🎁 💸 Warren Buffett's Top Picks Are Up +49.1%. Copy Them to Your Watchlist – For FreeCopy Portfolio

Major US banks inject $30 billion to rescue First Republic Bank

Published 03/15/2023, 09:18 PM
Updated 03/16/2023, 07:17 PM
© Reuters. The Credit Suisse logo adorns a sign at the entrance to their campus in Research Triangle Park in Morrisville, North Carolina, U.S., March 15, 2023.  REUTERS/Jonathan Drake
US500
-
C
-
BAC
-
GS
-
JPM
-
ALVG
-
FITB
-
WFC
-
MS
-
PNC
-
KEY
-
SBNY
-
FRCB
-

By Pete Schroeder, Chris Prentice and Nupur Anand

(Reuters) - Large U.S. banks injected $30 billion in deposits into First Republic Bank (NYSE:FRC) on Thursday, swooping in to rescue the lender caught up in a widening crisis triggered by the collapse of two other mid-size U.S. lenders over the past week.

Banking stocks globally have been battered since Silicon Valley Bank collapsed last week due to bond-related losses that piled up when interest rates surged last year, raising questions about what else might be lurking in the wider banking system.

Within days, the market turmoil had ensnared Swiss lender Credit Suisse, forcing it to borrow up to $54 billion from Switzerland's central bank to shore up liquidity.

By Thursday afternoon, the spotlight whipsawed back to the United States as big banks led an effort to prop up support for First Republic, a regional lender whose shares had tumbled 70% in the last nine trading sessions.

GRAPHIC - First Republic Bank's stock market collapse

https://fingfx.thomsonreuters.com/gfx/mkt/lgpdkjkggvo/Pasted%20image%201678991547543.png

Some of the biggest U.S. banking names including JPMorgan Chase & Co (NYSE:JPM), Citigroup Inc (NYSE:C), Bank of America Corp (NYSE:BAC), Wells Fargo (NYSE:WFC) & Co, Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) were involved in the rescue, according to a statement from the banks.

The deal was put together by power brokers including U.S. Treasury Secretary Janet Yellen, Federal Reserve Chairman Jerome Powell and JPMorgan Chase CEO Jamie Dimon, who discussed the package on Tuesday, according to a source familiar with the situation.

U.S. regulators said the show of support was most welcome, and showed the resilience of the banking system.

A round of financing on Sunday raised through JPMorgan had given First Republic access to $70 billion in funds. But that failed to calm investors as worries of a contagion deepened with the demise of Signature Bank (NASDAQ:SBNY) to follow that of SVB and depositors began moving cash to larger lenders.

First Republic Bank's stock closed up 10% on news of the rescue but its shares fell 18% in after-market trading, after the bank said it would suspend its dividend.

The bank's stock price is down more than 70% since March 6.

News of the rescue also helped boost Wall Street indexes, with JP Morgan, Morgan Stanley and Bank of America all up more than 1%, while the benchmark S&P 500 Banks Index recovered 2.2%.    Smaller banks also rebounded from the recent sell-off, with Fifth Third Bancorp (NASDAQ:FITB), PNC Financial Services Group (NYSE:PNC) and KeyCorp (NYSE:KEY) each gaining more than 4%.

EMERGENCY LIQUIDITY

Earlier in the day, Credit Suisse became the first major global bank to take up an emergency lifeline since the 2008 financial crisis as fears of contagion swept the banking sector and raised doubts over whether central banks will be able to sustain aggressive interest rate hikes to rein in inflation.

Rapidly rising interest rates have made it harder for some businesses to pay back or service loans, increasing the chances of losses for lenders already worried about a recession.

However, the European Central Bank raised interest rates by 50 basis points on Thursday as flagged, stressing the resilience of the euro area banking sector while assuring it had plenty of tools to offer liquidity support if needed.

The U.S. Federal Reserve is expected to follow the ECB move at its next meeting with a quarter-point interest-rate hike that just days ago looked derailed by turmoil in the banking sector.

Policymakers have tried emphasize that the current turmoil is different than the global financial crisis 15 years ago as banks are better capitalised and funds more easily available.

But central bank data on Thursday also showed that banks sought record amounts of emergency liquidity from the Federal Reserve in recent days, driving up the size of the Fed's balance sheet after months of contraction.

"The numbers, as we see them right here, are more consistent with the idea that this is just an idiosyncratic issue at a handful of banks," said Thomas Simons, money market economist with investment bank Jefferies.

Yellen said the U.S. banking system remains sound thanks to "decisive and forceful" actions following the collapse of Silicon Valley Bank.

Allianz (ETR:ALVG), one of Europe's biggest financial firms, said authorities were "well equipped" to deal with any liquidity crisis, "unlike what happened during" the 2007-2008 financial crisis.

BUYING TIME

Credit Suisse, a bank with a 167-year history, became the biggest European name swept up in the turmoil after its largest investor said it could not provide more funds due to regulatory constraints.

It said it would exercise an option to borrow up to 50 billion Swiss francs ($54 billion) from the Swiss National Bank, which confirmed it would provide liquidity to the bank against sufficient collateral.

Credit Suisse shares closed 19% higher on Thursday, recovering some of their 25% fall on Wednesday. Since March 8, before last week's collapse of SVB, European banks have lost around $165 billion in market value, Refinitiv data shows.

The stock market value of Switzerland's second-largest bank has fallen by 90% since its peak in February 2007 of around $91 billion, to around $8.66 billion following a prolonged slide in its shares.

Analysts said the measures will buy time for Credit Suisse to carry out a planned restructuring and possibly take further steps to pare back the Swiss lender.

© Reuters. FILE PHOTO: A person walks past a First Republic Bank branch in Midtown Manhattan in New York City, New York, U.S., March 13, 2023. REUTERS/Mike Segar

GRAPHIC - Credit Suisse goes off piste

https://www.reuters.com/graphics/CREDITSUISSEGP-STOCKS/akveqegdgvr/chart.png

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.