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Large US banks lead First Republic rescue, Credit Suisse takes up $54 bln lifeline

2023-03-16T18:51:09Z

Credit Suisse shares soared Thursday (March 16) after the company secured a $54 billion lifeline from the Swiss National Bank to shore up liquidity and investor confidence. Julian Satterthwaite reports.

A logo is pictured on the Credit Suisse bank in Geneva, Switzerland, March 15, 2023. REUTERS/Denis Balibouse

Several large banks are in talks to deposit billions of dollars in First Republic Bank (FRC.N), sources familiar with the matter said on Thursday, as the U.S. lender became the latest to be swept up in fears of a fast-growing banking crisis.

The collapse of Silicon Valley Bank last week has triggered days of market turmoil, ensnaring Swiss lender Credit Suisse (CSGN.S) by Wednesday and forcing it to borrow up to $54 billion from Switzerland’s central bank to shore up liquidity and restore investor confidence.

The spotlight whipsawed back to the United States on Thursday as banks led an effort to shore up support for First Republic, a regional lender whose shares have tumbled 70% in the last nine trading sessions.

Four major banks including JPMorgan Chase & Co (JPM.N), Citigroup Inc (C.N), Bank of America Corp (BAC.N) and Wells Fargo & Co (WFC.N) are part of the rescue, one of the sources said. In all, 11 banks were involved and the rescue plan is supported by U.S. regulators, one of the sources said.

The plan involves banks depositing $29 billion into the lender, according to one source.

First Republic Bank’s stock was trading up about 10% on Thursday afternoon, erasing earlier losses after being halted several times on Thursday.

Shares of major U.S. banks bounced from recent lows, with JP Morgan (JPM.N), Morgan Stanley (MS.N) and Bank of America (BAC.N) all up more than 1% on Thursday afternoon, while the benchmark S&P 500 Banks Index (.SPXBK) recovered 1.9%.

Smaller banks also rebounded from the recent selloff, with Fifth Third Bancorp (FITB.O) and Citizens Financial Group (CFG.N) up 1.9% and 3.2%, respectively.

Earlier, Credit Suisse became the first major global bank to be thrown an emergency lifeline since the 2008 financial crisis as fears of contagion swept the banking sector and raised doubts over whether central banks will be able to sustain aggressive interest rate hikes.

However, the European Central Bank raised interest rates by 50 basis points on Thursday as flagged, stressing the resilience of the euro area banking sector while assuring it had plenty of tools to offer liquidity support if needed.

The ECB said it was “monitoring current market tensions closely and stands ready to respond as necessary to preserve price stability and financial stability in the euro area.”

Credit Suisse shares closed up 19% higher, recovering some of their 25% fall on Wednesday. Since March 8, before last week’s collapse of SVB, European banks have lost around $165 billion in market value, Refinitiv data shows.

The unease spread beyond the financial sector, with German corporate treasurers urged by their industry association not to “underestimate the current situation.”

Policymakers have emphasized that the current turmoil – which has investors fearing another collapse like that of Lehman Brothers – is different than the global financial crisis 15 years ago as banks are better capitalised and funds more easily available.

U.S. Treasury Secretary Janet Yellen said the country’s banking system remains sound thanks to “decisive and forceful” actions following the collapse of Silicon Valley Bank.

Allianz (ALVG.DE), one of Europe’s biggest financial firms, said authorities were “well equipped” to deal with any liquidity crisis, “unlike what happened during” the 2007-2008 financial crisis.

Investors are also focused on any action by central banks, with traders now betting that the Federal Reserve, which last week was expected to accelerate its interest rate hikes in the face of persistent inflation, may hit pause or reverse course.

Rapidly rising interest rates have made it harder for some businesses to pay back or service loans, increasing the chances of losses for lenders already worried about a recession.

Credit Suisse said it would exercise an option to borrow up to 50 billion Swiss francs ($54 billion) from the Swiss National Bank, which confirmed it would provide liquidity to the bank against sufficient collateral.

Chief Executive Ulrich Koerner told Credit Suisse staff in a memo they should focus on facts as he pledged to move forward rapidly with a plan to streamline operations.

Switzerland’s second-largest bank’s stock market value has fallen by 90% since its peak in February 2007 of around $91 billion, to around $8.66 billion following a prolonged slide in its shares.

Analysts said the measures will buy time for Credit Suisse to carry out a planned restructuring and possibly take further steps to pare back the Swiss lender.

“We would not exclude the possibility of further restructuring statements from management designed to further simplify the bank,” Thomas Hallett at KBW said in a note.

Credit Suisse bankers contacted clients in Asia to reassure them after the latest inflow of funds.

“We’ve been telling them to read the statements and look at the fact that we are buying 3 billion francs’ worth of bonds because they are so cheap,” said a Hong Kong-based senior banker, who declined to be named.

The 167-year-old bank’s problems shifted into high gear on Wednesday after its largest investor said it could not provide more funds due to regulatory constraints.

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