A number of major American banks have invested $30 billion (£24.8 billion) in First Republic, a smaller regional bank that was deemed to be in danger of failing.
The action was taken as US authorities worked to calm public anxiety following a string of bank failures in the country about the stability of the banking sector.
Global concerns about the industry have stoked crisis worries.
US authorities termed the decision “very welcome”, while the banks said their action demonstrated their “assurance”.
They claimed the banking industry made big profits and had access to plenty of cash.
Subsequent developments didn’t alter this, they claimed. The top banks in America have demonstrated their faith in the nation’s banking system by their activities.
Financial markets were buoyed by news of the plans for the bailout from the 11 banks, led by JP Morgan and Citigroup, and shares in First Republic surged more than 20% at one point, causing trade to be halted.
But, a sell-off resumed in after-hours trading as a hint that worries persisted.
While investors concerned that the San Francisco-based company was the next bank in danger of a surge of consumers withdrawing their savings, the share price of the company fell by about 70% over the previous week.
US financial officials stated, “This show of support by a number of significant banks is highly welcome and underscores the resiliency of the banking system.
“Risk of spreading”
The 16th-largest lender in the US, Silicon Valley Bank (SVB), failed last week in the worst failure of a US bank since 2008. This brought attention to issues in the banking sector in the US.
The fall of New York’s Signature Bank came two days after that.
In an effort to stop more runs on bank deposits, authorities intervened to guarantee deposits over customary limits, but the financial markets have remained jittery.
With $318 billion in outstanding loans as of Wednesday, up from $15 billion a week earlier, the US central bank reported a jump in emergency lending to banks as an indication of systemic stress.
Included in that was about $12 billion provided by a fund established following the SVB collapse.
The extent of the Fed’s emergency lending rise “underlines that this is a very serious banking sector problem that will have big knock-on repercussions on the real economy,” said Paul Ashworth, chief North America economist at Capital Economics.
US Treasury Secretary Janet Yellen acknowledged the gravity of the incident while urging depositors to have faith in the system in front of Washington legislators.
Even though, in our opinion, the financial system as a whole is safe and robust, we felt that there was a major risk of contagion that might have brought down and sparked runs on numerous institutions.
Nevertheless, the deputy president of the European Central Bank (ECB), Luis de Guindos, claimed the banking system in Europe was “resilient” and enterprises there had “little exposure to the institutions of the US”.
He commented as the European Central Bank (ECB) announced an additional hike in interest rates from 2.5% to 3%, adhering to its plan for a raise despite concerns about how the action would effect the market turbulence.
Support for banks
Over the past year, central banks from all over the world have substantially increased borrowing prices in an effort to slow the rate of inflation.
The actions have caused a decline in the value of the sizable bond portfolios that banks purchased when interest rates were lower, which in turn led to the failure of Silicon Valley Bank and generated concerns about the situation at other businesses.
The struggling lending behemoth Credit Suisse, which was viewed as vulnerable in the wake of the US bank failures, will now have access to emergency reserves up to £44 billion, the Swiss National Bank announced on Wednesday.
After steep declines a day earlier, its shares recovered more than 15%, and major indices across Europe also rose.
Former Bank of England deputy governor Sir John Gieve told the BBC that central banks were “messaging” that such issues would be handled locally.
In the instance of Credit Suisse, he continued, the Swiss National Bank’s intervention was probably sufficient to prevent the problem from getting worse.
We’ve seen the Swiss central bank declare, “No, we won’t allow this grow into a disorderly collapse,” he remarked, referring to what happened overnight.
“I’m not sure what the future holds for Credit Suisse, but so far, they’ve managed to stay afloat, and it appears that the Swiss central bank will make sure they do so for a while so they can reorganise their affairs for the future.”
Since its founding in 1856, Credit Suisse has been involved in a number of scandals, including accusations of money laundering, spying, and high-profile exits.
It has cautioned that it does not anticipate becoming profitable until next year after losing money in 2021 and again in 2022. In recent months, customers withdrew millions of dollars from the company.
Officials had been keeping an eye on Credit Suisse’s developments, but according to White House spokesman Karine Jean-Pierre, their problems were “different” from those taking place in the US.
She claimed that the current economic climate was unrelated to its problems.