Major US banks inject $30 billion to rescue First Republic Bank
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[March 17, 2023] By
Pete Schroeder, Chris Prentice and Nupur Anand
(Reuters) - Large U.S. banks injected $30 billion in deposits into First
Republic Bank 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.
Some of the biggest U.S. banking names including JPMorgan Chase & Co,
Citigroup Inc, Bank of America Corp, Wells Fargo & Co, Goldman Sachs and
Morgan Stanley 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 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, PNC
Financial Services Group and KeyCorp 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.
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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
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, 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.
(Reporting by Pete Schroeder and Chris Prentice in Washington, Nupur
Anand in New York, Tom Westbrook in Singapore, Scott Murdoch in
Sydney, John Revill in Zurich, Amanda Cooper in London, Tom Sims in
Frankfurt, Akriti Sharma in Bengaluru, Rae Wee in Singapore, Chiara
Elisei and Dhara Ranasinghe in London, Vera Eckert and Ludwig Burger
in Frankfurt, Yasmin Mehnaz in Bengaluru, Noel Randewich in Oakland,
California; Writing by Deepa Babington, Sam Holmes and Alexander
Smith; Editing by Tomasz Janowski and Matthew Lewis)
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