First Republic leads surge in bank stocks as Fed comes into focus

(C) Reuters. FILE PHOTO: The Federal Reserve building is pictured in Washington, U.S., on March 19, 2019. REUTERS/Leah Millis/File Photo

By David Lawder, John Revill and David French

(Reuters) – Shares of U.S. regional lenders including battered First Republic Bank (NYSE:FRC) surged on Tuesday as Credit Suisse’s rescue eased fears of a wider banking crisis and investors turned their focus to the U.S. Federal Reserve’s next move.

The Fed’s relentless rate hikes to rein in inflation have been partly blamed for sparking the biggest meltdown in the banking sector since the 2008 financial crisis, and traders are split over whether the central bank will be forced to pause its hiking cycle on Wednesday to ensure financial stability.

The tumultuous 10 days for banks that culminated in the 3 billion Swiss franc ($3.2 billion) Swiss-regulator-engineered takeover of Credit Suisse by rival UBS were triggered by the collapse of Silicon Valley Bank, which sank under the weight of bond-related losses due to a surge in interest rates last year.

“The banking sector’s near-death experience over the last two weeks is likely to make Fed officials more measured in their stance on the pace of hikes,” said Standard Chartered (OTC:SCBFF) head of G10 FX research, Steve Englander.

GRAPHIC: Traders bet on rate hike as fears of bank crisis ease https://www.reuters.com/graphics/USA-RATES/FEDWATCH/xmpjkbnxmvr/chart.png

Worries over the health of midsized U.S. lenders linger, particularly First Republic Bank – which shed 90% of its market value this month. But Credit Suisse’s rescue appeared to have assuaged the worst fears of systemic contagion, pushing up shares of European banks and beaten-down U.S. regional lenders.

First Republic shares surged 53%, recovering some of their deep losses over the past two weeks, while larger U.S. banks also rallied. US Bancorp (NYSE:USB) surged 8.7%, while JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C), Wells Fargo (NYSE:WFC) and Bank of America (NYSE:BAC) all climbed 3% or more.

The S&P 500 banks index rallied 4.3%, on track for its largest one-day gain since November.

First Republic is looking at ways it can downsize if its attempts to raise new capital fail, two people familiar with the matter told Reuters. JPMorgan Chase has been helping the bank find new sources of capital after a $30 billion injection of deposits from big banks failed to stem fears over its viability.

The bank’s future will also be discussed at a two-day meeting of chief executives of major banks gathering in Washington starting Tuesday, sources familiar with the matter said.

Policymakers from Washington to Tokyo have stressed the current turmoil is different from the crisis 15 years ago, saying banks are better capitalised and funds more easily available.

In the latest effort to calm jitters, U.S. Treasury Secretary Janet Yellen said the country’s banking system was sound despite recent pressure.

Yellen said she was committed to taking actions that would mitigate risks to financial stability and taking necessary steps to ensure the safety of deposits and the U.S. banking system.

‘FEEL SECURE’

Yellen’s reassurances were echoed in Britain by Finance Minister Jeremy Hunt, who said banks and the financial system there were well-placed to cope with the problems, and by Swedish Central Bank Governor Erik Thedeen.

“We should also feel secure in the fact that the authorities that have the job to deal with this are working closely together and are working with the government. So there is good capacity to act should this head into another phase,” Thedeen said.

The European Central Bank’s top bank supervisor Andrea Enria said euro zone banks on average increased their capital ratios in the final quarter of last year and remain solid, adding that funding and liquidity positions were not “materially affected” by the Credit Suisse crisis.

Earlier, he had warned banks against being “caught off guard” by rising interest rates, in remarks the ECB said were drafted in February, before recent market upheavals.

Worries about a new financial crisis contributed to a tumble in German investor sentiment in March, the ZEW economic research institute said.

The central bank to the world’s central banks, the Bank for International Settlements, said it fully supported recent actions taken by the likes of the Swiss National Bank and Federal Reserve to address banking system problems.

“We support in full all the actions central banks have taken,” the head of the BIS, Agustin Carstens, said.

In a global response not seen since the height of the pandemic, the Fed at the weekend joined central banks in Canada, Britain, Japan, the euro zone and Switzerland in a co-ordinated action to enhance market liquidity.

GRAPHIC: Over $95 billion in market value wiped out in 2 weeks https://www.reuters.com/graphics/GLOBAL-BANKS/USA/myvmobkeovr/graphic.jpg

In Europe, the investor focus has shifted to the massive blow some Credit Suisse bondholders will take, prompting euro zone and British banking supervisors to try to stop a rout in the market for convertible bank bonds.

Additional Tier 1 bonds, or AT1s, are issued by banks to help them make up the capital buffers which regulators require them to hold. They can be converted into equity but until they are, they do not dilute a lender’s share capital.

EU authorities will never write off bank bonds before shares are wiped out, whether a bank is being wound down or there are “private solutions” to rescue it, the ECB’s Enria said.

At Credit Suisse, whose main regulators are in Switzerland, its AT1 prospectus made clear that holders would not recover any value. Nevertheless, lawyers are talking to a number of AT1 bond holders about possible legal action, law firm Quinn Emanuel Urquhart & Sullivan has said.

GRAPHIC: Credit Suisse rescue https://www.reuters.com/graphics/GLOBAL-BANKS/myvmobgwyvr/chart.png

($1 = 0.9280 Swiss franc)