On Thursday, large U.S. banks infused $30 billion in deposits into First Republic Bank to stabilize the regional lender caught in a crisis following the collapse of two other mid-sized U.S. banks.
The banking sector has been rocked since Silicon Valley Bank (SVB) collapsed last week due to significant bond-related losses triggered by last year’s interest rate hikes, raising concerns about broader systemic issues.
The crisis soon spread to Swiss lender Credit Suisse, forcing it to secure up to $54 billion from Switzerland’s central bank to bolster its liquidity.
By Thursday, U.S. financial institutions, including JPMorgan Chase, Citigroup, Bank of America, Wells Fargo, Goldman Sachs, and Morgan Stanley, coordinated efforts to support First Republic after its shares plummeted by 70% over nine trading sessions.
The rescue package was organized with the involvement of U.S. Treasury Secretary Janet Yellen, Federal Reserve Chairman Jerome Powell, and JPMorgan CEO Jamie Dimon.
U.S. regulators welcomed the rescue as a demonstration of the banking system’s resilience.
First Republic had previously raised $70 billion in funds through JPMorgan, but this failed to ease investor concerns, which intensified following the collapse of Signature Bank.
Despite closing up 10% after the rescue news, First Republic’s stock fell by 18% in after-hours trading after the bank announced it would suspend its dividend. The bank’s stock has dropped over 70% since March 6.
The rescue effort buoyed Wall Street, with major banks like JPMorgan, Morgan Stanley, and Bank of America rising over 1%, while the S&P 500 Banks Index gained 2.2%. Smaller banks, such as Fifth Third Bancorp, PNC Financial Services, and KeyCorp, also rebounded, gaining over 4%.
Earlier, Credit Suisse became the first major global bank to seek emergency funding since the 2008 financial crisis, reflecting growing fears of contagion across the banking sector.
Rising interest rates have complicated repayment or servicing of loans, increasing the risk of losses for banks already concerned about a possible recession.
The European Central Bank (ECB) raised interest rates by 50 basis points on Thursday, signaling confidence in the eurozone banking sector and assuring it has tools to provide liquidity if necessary.
The U.S. Federal Reserve is expected to follow with a quarter-point rate hike at its next meeting, despite recent banking turmoil.
Policymakers have stressed that the current situation differs from the 2008 financial crisis, highlighting that banks are better capitalized and liquidity is more readily available.
Despite assurances, central bank data showed record levels of emergency liquidity demand from U.S. banks, increasing the Fed’s balance sheet after months of decline.
“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,” commented Thomas Simons, a money market economist at Jefferies.
U.S. Treasury Secretary Janet Yellen stated that the banking system remains solid due to “decisive and forceful” actions after SVB’s collapse.
Allianz, a major European financial institution, expressed confidence that authorities are “well equipped” to manage any liquidity crisis, unlike during the 2007-2008 financial crisis.
Credit Suisse, facing its most significant crisis after its largest investor declined to provide more funds, will borrow up to 50 billion Swiss francs ($54 billion) from the Swiss National Bank.
The Swiss National Bank confirmed it would provide liquidity against sufficient collateral, allowing Credit Suisse some breathing room to implement its restructuring plans.
Credit Suisse’s stock closed up 19% on Thursday, recovering some of its 25% loss from the previous day. Since the collapse of SVB, European banks have lost around $165 billion in market value.
Credit Suisse’s market value has plummeted by 90% since its peak in 2007, from about $91 billion to around $8.66 billion today, following a long decline.
Analysts suggest that these measures will buy Credit Suisse time to carry out its restructuring and potentially take further steps to stabilize its operations.
