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Troubled bank stocks drop despite $84bn liquidity boost

March 17, 2023

European shares logged their steepest weekly drop in five months amid continued turbulence in the global banking sector. German Chancellor Olaf Scholz doesn't think Europe is heading for a new financial crisis.

A sign of Credit Suisse bank is seen on the branch building in Geneva, on March 15, 2023
The Swiss central bank has allowed Credit Suisse to borrow 50 billion francs ($54 billion) to reinforce the groupImage: Fabrice Coffrini/AFP

Shares of First Republic Bank and Credit Suisse dove back deep into the red on Friday as concerns of a wider banking crisis in the United States and Europe remained elevated.

The US regional lender's perceived value slumped 25% while Switzerland's second-largest bank closed down 8%, despite massive financial lifelines thrown by regulators over the previous 24 hours.

Larger US banks, including JPMorgan Chase & Co and Morgan Stanley, stepped in on Thursday to inject $30 billion (€28 billion) into First Republic to prevent it from suffering a run by depositors similar to Silicon Valley Bank and Signature Bank — two regional lenders that went under last week.

The shoring up of First Republic reflected "funding and liquidity strains on banks, driven by weakening depositor confidence," said ratings agency Moody's, which this week downgraded its outlook on the US banking system to negative.

Swiss intervention buys time

In Europe, the Swiss central bank gave Credit Suisse an emergency loan of up to $54 billion, also on Thursday.

But many analysts, investors and bankers think the loan facility has only bought Credit Suisse some time to work out what to do next.

The US and Swiss moves did initially boost stock markets. However, the selloff resumed Friday and the stock prices of other major banks also fell, with JP Morgan, Citigroup and Bank of America down at least 3% at one point. Many of their European peers ended Friday down around 1.5%.

Bank fears spread as Credit Suisse gets help

Eswar Prasad, a Cornell University economist, said Credit Suisse has become "an important bellwether of fragilities in the global banking system" and if it failed, it could shake confidence in the banking system, causing further central bank intervention.

In a sign of falling confidence, Morningstar Direct said the Swiss bank had seen more than $450 million in net outflows from its US and European-managed funds from March 13 to 15.

Reuters, meanwhile, cited five unnamed sources as saying that at least four major banks, including Societe Generale SA and Deutsche Bank AG, have put restrictions on their trades involving Credit Suisse Group AG or its securities.

Scholz says no 'danger' of new financial crisis

Despite the market volatility, German Chancellor Olaf Scholz told business daily Handelsblatt Friday that he doesn't believe that Europe is heading for a crisis.

"I don't see that danger," Scholz said, adding that deposits are safe. "We live in a completely different time," he told the paper, referring to comparisons with the 2008 financial crisis. Scholz is also a former finance minister.

Meanwhile, Reuters reported Friday that supervisors at the European Central Bank (ECB) saw no contagion for eurozone banks from the turmoil.

A source told the news agency that members of the Single Supervisory Board were told deposits remained stable across eurozone banks. Exposure to Credit Suisse was said to be immaterial.

The meeting — a reaction to rapid developments in the banking sector and market jitters — was the second of its kind this week.

Despite the reassurances, investors are betting that banking jitters would rein in the ECB's ability to raise interest rates much further after the central bank hiked by 0.5% on Thursday.

All eyes on next Fed meeting

Focus now shifts to the US Federal Reserve next week, with traders now seeing a 67% likelihood of a smaller 0.25% increase in interest rates in the world's largest economy.

Speculation on when the Fed might start slowing its increases had been ripe for months, but the SVB collapse poured fuel on that fire last week. 

SVB's demise was largely blamed on the sharp rise in borrowing costs, and concerns that other banks could suffer a similar fate, even sparking speculation that the Fed could cut rates to provide some stability. However, SVB's critics see the fault lying in the bank's own strategic errors, remaining overexposed to low-yield, long-term bonds even as interest rates and inflation were wiping out their returns.

Later Friday, SVB Financial — the parent company of Silicon Valley Bank — filed for a court-supervised reorganization under Chapter 11 bankruptcy protection.

The filing sets up a legal battle over the bank's remaining assets between the creditors of the holding company and regulators who are looking to make depositors whole.

SVB Financial Group believes it has approximately $2.2 billion of liquidity and has said it has other valuable securities and assets that are being considered for sale.

mm/msh (AFP, AP, Reuters)