Bank shares fall after First Republic bailout fails to reassure investors

Global banking stocks were hit by a renewed selloff on Friday as markets failed to take comfort in the bailout package arranged for First Republic Bank.

Renewed concerns about the health of the banking sector drove a broader drop in stock prices, taking the shine off an early morning rally following news that First Republic will be backed by a consortium of banks that will inject $30 billion into the lender.

The blue-chip S&P 500 fell 1.1 percent, while the Nasdaq Composite was down 0.8 percent. European markets also dragged lower amid a further fall in Credit Suisse shares, despite the Swiss National Bank’s pledge of liquidity support to the lender earlier this week.

Shares of First Republic fell 25 percent during morning trading on Wall Street. Larger banks suffered smaller declines, with JPMorgan Chase down 2.7 percent and Citigroup down 2.7 percent. The KBW banking index fell 5.1 percent.

JPMorgan, Bank of America, Citi and Wells Fargo will each deposit $5 billion into the ailing lender. Goldman Sachs and Morgan Stanley will each contribute $2.5 billion, while BNY Mellon, PNC Bank, State Street, Truist Bank and US Bank will each contribute $1 billion.

“Despite the ‘very welcome’ gesture from major banks, the update points to a bank still in the grips of a significant liquidity crisis,” said Jesse Rosenthal, head of US financial research at CreditSights.

In Europe, Credit Suisse gave up early gains to trade 7.5 percent lower. The Euro Stoxx Bank index, which has already fallen sharply this week, gave up early gains to trade 3.7 percent lower by early afternoon.

The broader Stoxx 600 fell 1.4 percent, while the German Dax fell 1.6 percent. France’s CAC 40 fell 1.7 percent, while the UK’s FTSE 100 fell 1.2 percent.

“The core problem is that the liquidity support does not solve the problem [Credit Suisse’s] known structural problems and especially the low profitability. . . The bank has a restructuring plan to address these issues over a three-year period, but it is uncertain whether markets will last that long,” said Andrew Kenningham, chief economist for Europe at Capital Economics.

Investors say the events of the past week could point to the onset of a recession and credit tightening.

“It is highly unlikely that we will see a positive scenario, especially given recent events,” said Orla Garvey, senior portfolio manager of fixed income at Federated Hermes. “The problem will be if banks pull out of lending, which historically has had a big impact on growth. But that could be avoided if central banks and regulators acted.”

Treasury bond markets were bleak as investors continued to consider central banks’ willingness to raise interest rates to fight inflation, while uncertainty reigned in the banking sector.

The European Central Bank announced its decision to raise interest rates by 0.5 percentage point on Thursday, but abandoned an earlier commitment to “continue raising interest rates significantly at a steady pace”.

The yield on two-year US Treasury bills, which is most sensitive to interest rate expectations, rose by 0.08 percentage point to 4.05 percent and the yield on ten-year bonds fell by 0.1 percentage point to 3.45 percent.

The yield on German two-year bonds fell 0.09 percentage point to 2.47 percent and the 10-year yield fell 0.1 percentage point to 2.14 percent.

The ECB’s decision has boosted the likelihood that the Federal Reserve will proceed with a rate hike of 0.25 percentage point next week, rather than a pause.

Earlier, Asian markets advanced after also being swept up this week by fears of a banking crisis. Japan’s Topix rose 1.2 percent, South Korea’s Kospi gained 0.7 percent and Australia’s S&P/ASX 200 rose 0.4 percent. Hong Kong’s Hang Seng and China’s CSI 300 rose 1.6 percent and 0.5 percent, respectively.

In currency markets, the dollar index, a measure of the greenback against six peer currencies, fell 0.2 percent. The euro rose by 0.2 percent and the British pound by 0.2 percent.

Brent crude rose 1.4 percent and its U.S. counterpart West Texas Intermediate gained 1.2 percent after they plunged to their lowest prices in more than a year on Wednesday.

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