22nd March 2023 – (New York) The troubled U.S. lender, First Republic Bank, is scrambling to secure a capital infusion amidst fears of wider implications for the banking sector. Investors are split over whether the U.S. central bank will be forced to pause its hiking cycle to ensure financial stability. The Federal Reserve’s meeting later in the day is now a major focus for traders.
The banking sector’s biggest meltdown since the 2008 financial crisis has partly been blamed on the Federal Reserve’s relentless rate hikes to rein in inflation. The collapse of Silicon Valley Bank, which sank under the weight of bond-related losses due to surging interest rates, set off a tumultuous 10 days for banks. This culminated, for now, in the 3 billion Swiss franc ($3.2 billion) Swiss regulator-engineered takeover of Credit Suisse by rival UBS on Sunday.
Credit Suisse’s Additional Tier-1 (AT1) bondholders’ wipeout has sent shockwaves through bank debt markets, and some Asian lenders may find it difficult to replenish their capital by issuing AT1 bonds, according to Citigroup. The health of mid-sized U.S. lenders, particularly First Republic, continues to be a concern.
First Republic’s efforts to secure a capital infusion continued without success on Tuesday, as the troubled regional lender started to plan for the possibility it may need to downsize or get a government backstop. Shares of First Republic tumbled 9 per cent in extended trade on Tuesday evening, having surged as much as 60 per cent and closing regular trade up 30 per cent. First Republic has shed 80 per cent of its market value this month.
The San Francisco-based bank is looking at ways to downsize if its attempts to raise new capital fail, according to three people familiar with the matter. 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. Among options being discussed, the possibility the government could play a role in lifting assets out of First Republic that have eroded its balance sheet.
Policymakers from Washington to Tokyo have stressed that the current turmoil is different from the crisis 15 years ago, saying banks are better capitalised, and funds are more easily available. However, Australia’s prudential regulator has started asking the country’s banks to declare their exposure to startups and crypto-focused ventures following the collapse of Silicon Valley Bank.
U.S. Treasury Secretary, Janet Yellen, said the country’s banking system was sound despite recent pressure. Deputy Treasury Secretary, Wally Adeyemo, said a review of the failures of Silicon Valley Bank and rival Signature Bank was in order. “It’s important that we review the failures of the two banks in question to ensure we have a set of rules and procedures for the banking system that continues to protect our economy and depositors across the country,” he said.
Political pressure continued to grow in the United States to hold bank executives accountable. The Senate Banking Committee’s chairman said the panel will hold the “first of several hearings” on the collapse of SVB and Signature Bank on 28th March.