March 20 (Reuters) – Shares in US lender First Republic plunged as much as 50% on Monday amid fears it might need a second bailout to stay afloat and bucking a recovery rally in bank stocks , triggered by UBS Group ‘s state – backed takeover of Credit Suisse .
Less than a week after major US banks pumped $30 billion in deposits into the mid-tier US lender, investors exited First Republic over fears the capital injection would not be enough. Rating agency S&P Global also downgraded it lower to junk status on Sunday, citing liquidity risks.
JPMorgan Chase & Co (JPM.N) CEO Jamie Dimon is in talks with other major banks about new efforts to stabilize First Republic with a possible investment in the lender, the Wall Street Journal reported, citing people familiar with the matter .
JPMorgan and First Republic declined to comment on the report. A spokesman for First Republic referred to an earlier statement in which the bank said it was “well positioned to manage short-term deposits.”
The turmoil at First Republic overshadowed an otherwise upbeat day for global banking stocks, led by relief that UBS Group AG’s (UBSG.S) acquisition of 167-year-old Credit Suisse Group AG (CSGN.S) would avert a broader banking crisis .
“There (is) more good news than bad news on the banking front,” said Art Hogan, chief market strategist at B. Riley Wealth. “First and foremost, the merger of Credit Suisse and UBS certainly takes a lot of the stress out of the global banking system.”
The 3 billion-franc ($3.2 billion) deal for the struggling Swiss bank – which was once valued at more than $90 billion – was drafted by Swiss regulators and announced on Sunday.
European bank stocks (.SX7P) rebounded from recent losses, while the S&P 500 bank index (.SPXBK) was up 0.6% on Wall Street.
US regional lenders also rose. PacWest Bancorp (PACW.O) rose nearly 9% after announcing that deposit outflows had stabilized and its cash on hand exceeded total uninsured deposits.
Bonds issued by major European banks fell after some Credit Suisse bondholders were wiped out in the deal, but UBS shares closed down 1.3%, recovering from a 16% plunge amid concerns about the deal’s long-term benefits and prospects for Switzerland, which was once considered a paragon of sound banking.
A deal on Sunday for a unit of New York Community Bancorp (NYCB.N) to buy deposits and loans from the failed Signature Bank (SBNY.O) also boosted sentiment at US banks. Shares in New York Community Bancorp are up 34%.
The turmoil that gripped banks last week was sparked by the collapse of mid-tier US lenders Silicon Valley Bank and Signature Bank, which quickly ensnared Credit Suisse as investors fretted over other ticking bombs in the banking system.
The Federal Deposit Insurance Corporation has decided to wind up Silicon Valley Bank and hold two separate auctions for its traditional deposit unit and its private bank after failing to find a buyer for the failed lender last week.
With worries over Credit Suisse easing, attention now turns to the US Federal Reserve, whose relentless hikes in interest rates to quell inflation were seen as the catalyst for the turmoil. Traders have now increased their bets that the central bank will pause its cycle of rate hikes on Wednesday to try to ensure financial stability.
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[1/2] Buildings of Swiss banks UBS and Credit Suisse are seen on Paradeplatz in Zurich, Switzerland, March 20, 2023. REUTERS/Denis Balibouse
Politicians from Washington to Europe have stressed that the current turmoil is unlike the global financial crisis 15 years ago, as banks are better capitalized and funds are more readily available.
Still, leading central banks vowed over the weekend to provide dollar liquidity to stabilize the financial system and prevent bank jitters from spreading into a bigger crisis.
In a global response not seen since the peak of the pandemic, the US Federal Reserve said it has joined central banks in Canada, Britain, Japan, the euro zone and Switzerland in coordinated action to improve market liquidity.
Investors’ focus in Europe shifted to the massive hit some Credit Suisse bondholders are about to suffer, prompting eurozone and UK banking regulators to try to avert a defeat in the convertible bond market.
Regulators said owners of this type of debt would not suffer losses until shareholders were wiped out — unlike at Credit Suisse, whose main regulator is in Switzerland.
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The eleventh-hour Swiss bailout is backed by a massive government guarantee, helping to avert one of the biggest bank failures since the fall of Lehman Brothers in 2008.
However, the Swiss regulator ruled that Credit Suisse’s additional Tier 1 (AT1) bonds with a face value of $17 billion will be valued at zero, angering some holders of the debt who thought they were better protected than that shareholders.
AT1 bonds — a $275 billion sector also known as “contingent convertibles” or “CoCo” bonds — can be converted into equity or written down when a bank’s capital level falls below a certain threshold.
The deal will also make UBS Switzerland’s only global bank and the Swiss economy more dependent on a single lender.
S&P announced that it had revised its outlook for UBS to negative over-execution risk, but confirmed its ratings.
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Switzerland’s two main political parties slammed the takeover, saying the huge government support – which could add up to $280 billion – created huge risks for the country.
“What happened is terrible for Switzerland’s credibility,” said Roger Nordmann, leader of the Social Democrats in the Swiss parliament.
“This is a warning shot for Switzerland against banks that are too big.”
($1 = 0.9280 Swiss Francs)
Reporting by Medha Singh and Ankika Biswas in Bengaluru; John Revill in Zurich; Shubham Batra, Amruta Khandekar and Ankika Biswas in Bengaluru; Stefania Spezzati, Oliver Hirt and John O’Donnell in Zurich and Noel Randewich in Oakland, California; Additional reporting by Reuters offices; Written by Sam Holmes, Toby Chopra and Deepa Babington; Edited by Muralikumar Anantharaman, Kirsten Donovan and Nick Zieminski
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