The $30 billion injection into First Republic Bank allayed market fears about an impending bank collapse on Friday, but a subsequent slump in shares of the troubled U.S. bank showed investors remained worried about cracks in the sector.
Big U.S. banks pumped the funds into the San Francisco-based bank on Thursday, rushing to rescue the bank caught in a deepening crisis triggered by the collapse of two other mid-sized U.S. banks over the past week.
The deal was engineered by big market players, including U.S. Treasury Secretary Janet Yellen, Federal Reserve Chairman Jerome Powell and JPMorgan Chase CEO Jamie Dimon, who discussed the package this week, according to a source familiar with the situation.
The package arrived less than a day after Swiss bank Credit Suisse (SIX:CSGN) secured an emergency loan from the Swiss central bank of up to $54 billion to shore up its liquidity.
Those deals helped restore calm to global markets on Thursday and Friday after a shaky week for bank stocks.
However, while First Republic Bank shares rose 10% on news of the bailout, they fell 18% after the bank said it would suspend its dividend and disclosed its cash position and the amount of emergency liquidity it needs.
According to several analysts, policymakers appear willing to deal quickly with systemic risks, but worry that the possibility of a banking crisis is far from gone.
“They will inject the money into First Republic to keep it alive for self-interest, … to stop the spread of panic among banks. Then they will gradually withdraw it and the bank will die a slow death,” said Mathan Somasundaram, founder of analytics firm Deep Data Analytics in Sydney.
“Yellen made it clear overnight that all bank deposits are protected, but the bank might not be,” he said.
Some of the biggest names in U.S. banking, such as JPMorgan Chase & Co (NYSE:.JPM), Citigroup Inc (NYSE:C), Bank of America Corp (NYSE:BAC), Wells Fargo (NYSE:WFC) & Co, Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS), participated in the bailout, according to a statement from the banks.
While the support has averted an imminent collapse, investors were surprised by the latest revelations about First Republic’s cash position, even after the injection, and by how much it and other banks leaned on the Federal Reserve this month.
Data on Thursday showed U.S. banks requested record amounts of emergency liquidity from the Federal Reserve in recent days, increasing the size of the central bank’s balance sheet after months of contraction.
More generally, concerns remain about the risks of contagion.
“I don’t think we’re at the heart of a global financial crisis. Balance sheets are much better than in 2008, banks are better regulated,” said Karen Jorritsma, head of Australian equities at RBC Capital Markets. “But people are worried that the risk of contagion is real and that shakes confidence.”
For now, policymakers are confident in the resilience of the banking system and have sought to stress that the current turbulence is different from the global financial crisis 15 years ago, at a time when banks are better capitalized and funds are easier to come by.
On Thursday, the European Central Bank pressed ahead with a 50 basis point rate hike, arguing that euro zone banks were in good shape and that, if anything, the move to higher rates should bolster their margins.
Attention is now focused on the Fed’s policy decision next week and whether it will maintain its aggressive interest rate hikes in its bid to control inflation.
In Asia, Singapore, Australia and New Zealand said they were keeping an eye on financial markets but were confident their local banks were well capitalized and able to withstand major shocks.
Japan’s finance ministry, financial regulator and central bank said they would meet on Friday to discuss financial market developments.
Bank stocks around the world have been hit since Silicon Valley Bank plunged last week due to bond-related losses that piled up when interest rates rose last year, raising questions about what else might be stalking the banking system as a whole.
Within days, market turbulence had ensnared Credit Suisse, forcing it to borrow from the Swiss central bank.
On Thursday, attention turned back to the United States, where big banks backed First Republic, a regional bank. Its shares have fallen more than 70% since March 6.
Credit Suisse became the first major global bank to resort to an emergency lifeline since the 2008 financial crisis, when fear of contagion gripped the banking sector and raised questions about whether central banks will be able to sustain aggressive rate hikes to curb inflation.
Rapid rate hikes have made it harder for some companies to repay or service loans, increasing the chances of losses for banks already worried about a recession.
Credit Suisse shares closed up 19% on Thursday, recovering some of their 25% drop on Wednesday. Since March 8, European banks have lost about $165 billion in market value, according to Refinitiv data.