Stock markets soar as Wall Street dives to save First Republic

  • By Nick Edser
  • Business reporter

image source, Getty Images

Equity markets rose after a group of US banking giants stepped in to bail out a smaller regional lender, which was believed to be at risk of bankruptcy.

Investor concerns of a banking sector crisis were allayed after 11 US banks injected $30bn (£24.8bn) into First Republic.

Recent bank collapses in the US have sparked fears about the health of the banking system.

Among British banks, shares of Lloyds and Barclays rose 1.3%.

The stock markets in France and Germany rose by about 0.6% and the Japanese Nikkei index previously closed 1.2% higher.

The 11 US banks that announced the aid said the move reflected their “confidence in the country’s banking system”.

US financial officials said the move was “very welcome and demonstrates the resilience of the banking system”.

After the bankruptcy of two US banks last week – Silicon Valley Bank (SVB) and Signature Bank – investors are afraid that other banks will also collapse.

US regulators intervened over the weekend to ensure that customers at SVB and Signature Bank had full access to their money.

Shares of San Francisco-based First Republic were down nearly 70% over the past week amid fears it could be the next bank to risk a stampede of customers withdrawing their deposits.

But the 11-bank bailout, led by JP Morgan and Citigroup, boosted stock markets, and shares in First Republic rose more than 20% at one point.

However, there are signs that not all concerns have been allayed.

Shares in First Republic fell 20% in after-hours trading on the stock market after the bank said it was suspending its dividend — payment to shareholders — “during this period of uncertainty.”

Swetha Ramachandran, investment director at GAM Investments, said authorities acted “proactively”.

“What they’re trying to do is really shield the specific issues around individual isolated banks to prevent them from becoming systemic,” she told the BBC’s Today programme.

“So this is very different from 2008, which was a widespread problem in the banking sector.”

On Thursday, US Treasury Secretary Janet Yellen said “the banking system is generally safe and sound,” while European Central Bank (ECB) Vice President Luis de Guindos said the European banking sector was “resilient.”

Swiss credit

Europe has not escaped the jitters in the banking sector, due to the problems at the Swiss banking giant Credit Suisse.

Shares in Credit Suisse fell earlier this week on future concerns before the Swiss National Bank said on Wednesday it would provide the bank with up to £44bn in emergency funds.

Credit Suisse shares opened higher on Friday, but then fell back. Shares of the bank are now down about 22% since the start of the week.

Central banks around the world have raised borrowing costs sharply over the past year to try to curb the pace of general price increases or inflation.

The moves have eroded the value of the large portfolios of bonds bought by banks when interest rates were lower, a change that contributed to the collapse of Silicon Valley Bank, and raised questions about whether other companies in a similar situation.

Jeffrey Cleveland, chief economist at US asset manager Payden and Regal, said other banks could be caught up in the problem.

“There could be other vulnerabilities…if central banks plan to keep raising interest rates,” he told the BBC’s Today programme.

“When that happens, historically we see vulnerability, we see problems in the financial system.”

Before the turbulence erupted in the banking sector, both the US Federal Reserve and the Bank of England were expected to raise interest rates further next week. However, due to recent events, some have speculated that these rate hikes could be scaled back or even scrapped.

On Thursday, the ECB announced a further rate hike from 2.5% to 3%.

“For the ECB, their main battle right now is against inflation,” said Ms Ramachandran of GAM Investments.

“While looking at the broader stability of the financial market, I think their view was that the Credit Suisse issues are idiosyncratic and limited to that particular bank.”

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