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The situation at the embattled US regional bank, First Republic, remains precarious despite a concerted fundraising campaign by the largest US financial institutions. On Monday, the stock fell 47 percent to a record low of about $12.
Financial markets have generally stabilized following the urgent takeover of struggling Credit Suisse by Swiss rival UBS earlier this week, with investors’ distrust of retail banks still high.
First of all, San Francisco’s First Republic Bank, whose shares have fallen nearly 90 percent since the start of the year, remains a major emergency.
On Thursday, eleven major US banks, including industry leaders JPMorgan Chase, Bank of America, Citigroup and Goldman Sachs, sought to bolster the collapsing regional bank with uninsured deposits totaling $30 billion. The recovery plan was carried out in close coordination with the Ministry of Finance and the central bank. However, the expected salvation did not come true.
Despite relief efforts, investors have stockpiled the options market on a large scale with papers betting that prices will fall further. According to US media reports, JPMorgan and other major banks are already considering converting some of their deposits into billions of dollars of capital flows to help the troubled financial institution get back on its feet.
This was preceded by a further downgrade of First Republic’s credit rating by rating agency Standard & Poor’s. Credit watchers say the $30 billion deposits will ease acute liquidity pressures but may not solve the bank’s “significant” problems.
But with the exception of First Republic Bank, stress in the US banking sector eased significantly on Monday. Meanwhile, most of the other institutions counted by investors reported price increases. Since the bankruptcy of crypto bank Silvergate and the failures of Silicon Valley and Signature Bank has thrown the industry into chaos, the US banking industry has already transformed into a kind of bipartisan society.
At times, deposits were shifted en masse from small institutions to large banks, which are subject to tighter capital regulations because of their systemic importance assumed by financial regulators.
One reason for this change is that some smaller regional financial institutions have accounts disproportionately exceeding the $250,000 statutory insurance limit. FDIC deposit insurance doesn’t actually need to intervene here.
In the case of Silicon Valley and Signature Bank, the U.S. government issued a sweeping guarantee on bank vaults to prevent a nationwide storm. However, the situation for other institutes is not clear yet. According to the Wall Street Journal, nearly $70 billion was withdrawn from the First Republic in just a few days—about 40 percent of the bank’s total deposits.
The so-called interest rate risk is at the heart of the banking crisis. Silicon Valley Bank, for example, has invested enormous sums in long-term low-interest bonds, one of the safest investments in the financial market. However, this portfolio has lost a lot of value because the US Federal Reserve so quickly and significantly increased the key interest rate to combat high inflation.
This caused the balance sheet to spiral out of control and ultimately triggered a massive withdrawal of client funds due to liquidity concerns. So unlike, for example, the toxic mortgage securities of the 2008 financial crisis, the big problem was poorly managed interest rate risks, not high and opaque credit risks.
So far, the current turbulence has only affected individual banks – mostly with domestic problems. According to most experts, the situation is fundamentally different from previous uncontrolled fires in the financial system.
However, there are warnings of greater dangers still lurking on banks’ balance sheets. A recent messy study assumes that nearly 190 US banks are grumbling under the high interest rate risks on their balance sheets.
The analysis estimates the total of customer deposits that may be at risk at approximately $300 billion. Researchers point out that Silicon Valley Bank is far from being the worst-capitalized bank in the US, with 10 percent of banks there having larger unrealized losses on their balance sheets.
(SDA)
Source :Blick
I’m Tim David and I work as an author for 24 Instant News, covering the Market section. With a Bachelor’s Degree in Journalism, my mission is to provide accurate, timely and insightful news coverage that helps our readers stay informed about the latest trends in the market. My writing style is focused on making complex economic topics easy to understand for everyone.
