Bankers of all countries, unite! Even 11 American banks rescue First Republic

Financial markets are slowly recovering after several American banking giants stepped in to save a smaller regional lender, which was believed to be on the brink of collapse. Investor concerns about the banking sector crisis eased after 11 American banks injected $30 billion into First Republic, Reuters reported.

Recent bank collapses in the U.S. have sparked legitimate fears about the health of the domestic banking system and prompted investors to carefully consider where they want to keep their money.

The UK stock index FTSE 100 recorded gains on Friday, while earlier the Japanese index Nikkei rose by 1.2 percent, supported by banking stocks and electronics. The eleven American banks that announced support stated that this action reflects their ‘confidence in the country’s banking system’, BBC reported.

– This expression of support from a group of large banks is very welcome and shows the resilience of the banking system – said American financial officials.

‘Authorities are acting proactively’

After the collapse of Silicon Valley Bank (SVB) and Signature Bank, investors became concerned that other banks could face the same fate. American regulators stepped in over the weekend to ensure that SVB and Signature Bank clients had full access to their money.

Shares of San Francisco-based First Republic fell nearly 70 percent during the past week, due to fears that it would be the next bank facing a rush of clients frantically withdrawing their deposits.

However, the rescue plan of 11 banks, led by JP Morgan and Citigroup, boosted stock markets, and shares of First Republic rose by more than 20 percent at one point.

Nevertheless, there are signs that not all concerns have been alleviated. Shares of First Republic fell 20 percent in after-hours trading after the bank announced it would suspend shareholder payouts ‘during this period of uncertainty.’

There were also other signs of tension in the banking sector. The American central bank reported an increase in emergency lending to banks, with $318 billion in outstanding loans on Wednesday, compared to $15 billion a week earlier.

Swetha Ramachandran, investment director at GAM Investments, stated that authorities are acting ‘proactively.’

– What they are trying to do is actually fence off specific problems around individual isolated banks to prevent them from becoming systemic… So, this is different from 2008, which was a widespread problem in the banking sector – she told BBC’s Today program.

It is worth noting that on Thursday, U.S. Treasury Secretary Janet Yellen stated that the ‘banking system is generally safe and sound’, while the Vice President of the European Central Bank (ECB), Luis de Guindos, said that the European banking sector is ‘resilient.’

Swiss debacle

Europe has not escaped problems in the banking sector, due to difficulties with the Swiss banking giant Credit Suisse. The bank’s shares plummeted earlier in the week due to concerns about its future, before the Swiss National Bank (SNB) announced on Wednesday that it would provide the bank with up to £44 billion in emergency funds.

Central banks around the world have significantly raised borrowing costs over the past year in an attempt to curb the pace of overall price growth or inflation. These moves have hurt the values of large bond portfolios that banks purchased when rates were lower, a change that contributed to the collapse of SVB and raised questions about whether other companies are facing a similar situation.

Jeffrey Cleveland, chief economist at American asset management firm Payden and Regal, stated that other banks could be affected by the situation.

– There could be other vulnerabilities… if central banks intend to continue raising interest rates. Historically, when this happens, we see fragility, we see problems in the financial system. I would not be surprised at all if other vulnerabilities emerge – he told BBC’s Today program.

Before the turbulence in the banking sector erupted, it was expected that both the U.S. Federal Reserve and the Bank of England (BoE) would further raise interest rates at meetings next week. However, due to recent events, some speculated that those rate increases could be reduced or even canceled.

The ECB announced on Thursday a further increase in interest rates from 2.5 percent to 3 percent.

– Their main battle right now is inflation. While they are monitoring broader financial market stability, I think their view was that the problems of Credit Suisse are idiosyncratic and pertain to that specific bank – said Ramachandran from GAM Investments.