Central banks in spotlight as US authorities focus on stability, First
Republic
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[March 22, 2023] By
Nupur Anand, Lananh Nguyen and Andrea Shalal
(Reuters) - U.S. authorities are set to explore ways to bolster
financial stability, along with steps to tackle the problems facing
First Republic Bank, as central banks consider whether recent banking
sector turmoil has reduced the need for interest rate rises.
With market volatility easing, Wednesday's Federal Reserve meeting is in
focus, with traders split over whether the U.S. central bank will be
forced to pause its hiking cycle.
The Fed, whose relentless rate hikes to rein in inflation are among
factors blamed for the biggest meltdown in the banking sector since the
2008 financial crisis, is tipped to raise rates by 25 basis points, half
the 50 bps move foreseen before the sector shake-up.
European Central Bank President Christine Lagarde said on Wednesday that
the banking turmoil may strengthen transmission of the ECB's interest
rate increases, which are just starting to take effect. She has
previously said the market ructions may do some of the ECB's tightening
for it, if the effects on credit dampens demand and inflation.
But an unexpected jump in UK inflation last month led investors to bet
heavily that the Bank of England will raise interest rates by at least
another 25 bps on Thursday.
And less than two weeks after Silicon Valley Bank (SVB) sank under the
weight of bond-related losses due to surging interest rates, the CEO of
hedge fund Man Group, Luke Ellis, said the turmoil was not over and
predicted further bank failures.
SVB's collapse kicked off a tumultuous 10 days for banks which led to
the 3 billion Swiss franc ($3.2 billion) Swiss regulator-engineered
takeover of Credit Suisse by rival UBS.
While that deal brought some respite to battered banking stocks, U.S.
lender First Republic remains firmly in the spotlight. It is looking at
ways to shrink if it cannot raise new capital, three people familiar
with the matter said.
First Republic shares fell 9% in extended trade on Tuesday, having
surged as much as 60% at one stage.
Scenarios for the bank were being discussed as major bank CEOs gathered
in Washington for a scheduled two-day meeting starting Tuesday, sources
familiar with the matter said.
JPMorgan Chase has been helping the San Francisco-based bank seek new
capital after a $30 billion injection of deposits from big banks failed
to stem fears over its viability.
'HEAD IN SAND'
The wipeout of Credit Suisse's Additional Tier-1 (AT1) bondholders has
sent shockwaves through bank debt markets, and some Asian lenders may
find it difficult to replenish their capital by issuing such bonds,
Citigroup said on Wednesday.
But one of the largest investors in the Credit Suisse bonds that were
wiped out in the UBS takeover still believes in the value of the debt
class and the "bail-in" system designed to save banks seen as too big to
fail.
Spectrum Asset Management Inc said on Monday it had liquidated all its
Credit Suisse positions in late trading on Saturday before the
contingent convertible debt, called CoCos by traders, were written down
to zero in the UBS deal.
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A person walks past the Park Avenue
location of the First Republic Bank, in New York City, U.S., March
10, 2023. REUTERS/David 'Dee' Delgado
"Anybody that bought CoCos who didn't think 'bailed-in' had their
head in the sand. Nobody likes it when it happens, but that's the
whole idea behind CoCos," Philip Jacoby, chief investment officer at
Spectrum, told Reuters.
And UBS said on Wednesday it would buy back 2.75 billion euros
($2.96 billion) worth of debt it issued less than week ago, seeking
to boost confidence among investors rattled by its $3 billion rescue
of rival Credit Suisse at the weekend.
For now, the Swiss bank rescue appears to have assuaged the worst
fears of systemic contagion, boosting shares of European banks and
U.S. regional lenders.
The S&P 500 banks index rallied 3.6%, its largest one-day gain since
November, on Tuesday and shares in European banks were largely flat
on Wednesday.
Policymakers from Washington to Tokyo have stressed the turmoil is
different from the crisis 15 years ago, saying banks are better
capitalised and funds more easily available.
Nevertheless, Australia's prudential regulator has started asking
the country's banks to declare their exposure to startups and
crypto-focused ventures following the collapse of Silicon Valley
Bank, according to the Australian Financial Review.
After Treasury Secretary Janet Yellen said on Tuesday that the U.S.
banking system was sound despite recent pressure, Deputy Treasury
Secretary Wally Adeyemo said a review of the failures of SVB and
rival Signature Bank was in order.
POST-MORTEM
"It's ... important that we review the failures of the two banks in
question to ensure we have a set of rules and procedures for the
banking system that continues to protect our economy and depositors
across the country," Adeyemo said at an event hosted by the U.S.
Hispanic Chamber of Commerce.
"We of course continue to monitor the current situation and consider
what steps can be taken to further strengthen America's financial
stability," he said, without elaborating.
Political pressure continued to grow in the United States to hold
bank executives accountable. The Senate Banking Committee's chairman
said the panel will hold the "first of several hearings" on the
collapse of SVB and Signature Bank on March 28.
Although the Fed has said its review of SVB's supervision will be
finished by May 1 and released to the public, the recent turbulence
in financial markets and the banking system is likely to feature
prominently in its chief Jerome Powell's post-meeting news
conference on Wednesday.
($1 = 0.9280 Swiss franc)
(Additional reporting by Sumeet Chaterjee, Tatiana Bautzer, Saeed
Azhar, Scott Murdoch, Tom Westbrook, Shubham Batra, Amruta Khandekar,
Ankika Biswas, Noel Randewich and Francesco Canepa, Akriti Sharma,
Amanda Cooper: Writing by Lincoln Feast and Alexander Smith; Editing
by Sam Holmes and Catherine Evans)
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