While recent market turmoil has eased, the Federal Reserve’s meeting is now the major focus, with traders split over whether the U.S. central bank will be forced to pause its hiking cycle.
The Fed‘s relentless interest rate hikes to rein in inflation have been blamed in part for sparking the biggest meltdown in the banking sector since the 2008 financial crisis.
First Republic, which has lost 80% of its market value this month, is looking at ways to shrink if its attempts to raise new capital fail, three people familiar with the matter said.
Shares of First Republic fell 9% in extended trade on Tuesday, having surged as much as 60% at one stage.
Scenarios for the bank were being discussed as major bank CEOs gathered in Washington for a scheduled two-day meeting starting Tuesday, sources familiar with the matter said.
JPMorgan Chase has been helping the San Francisco-based bank seek new capital after a $30 billion injection of deposits from big banks failed to stem fears over its viability. The sudden collapse of Silicon Valley Bank (SVB), which sank under the weight of bond-related losses due to surging interest rates, kicked off a tumultuous 10 days for banks which led to the 3 billion Swiss franc ($3.2 billion) Swiss regulator-engineered takeover of Credit Suisse by rival UBS.
‘HEAD IN SAND’
The wipeout of Credit Suisse’s Additional Tier-1 (AT1) bondholders has sent shockwaves through bank debt markets, and some Asian lenders may find it difficult to replenish their capital by issuing such bonds, Citigroup said on Wednesday.
But one of the largest investors in the Credit Suisse bonds that were wiped out in the UBS takeover still believes in the value of the debt class and the “bail-in” system designed to save banks seen as too big to fail.
Spectrum Asset Management Inc said on Monday it had liquidated all its Credit Suisse positions in late trading on Saturday before the contingent convertible debt, called CoCos by traders, were written down to zero in the UBS deal.
“Anybody that bought CoCos who didn’t think ‘bailed-in’ had their head in the sand. Nobody likes it when it happens, but that’s the whole idea behind CoCos,” Philip Jacoby, chief investment officer at Spectrum, told Reuters.
And UBS said on Wednesday it would buy back 2.75 billion euros ($2.96 billion) worth of debt it issued less than week ago, seeking to boost confidence among investors rattled by its $3 billion rescue of rival Credit Suisse at the weekend.
For now, the Swiss bank rescue appears to have assuaged the worst fears of systemic contagion, boosting shares of European banks and U.S. regional lenders.
The S&P 500 banks index rallied 3.6%, its largest one-day gain since November, on Tuesday and shares in European banks were largely flat on Wednesday.
Policymakers from Washington to Tokyo have stressed the turmoil is different from the crisis 15 years ago, saying banks are better capitalised and funds more easily available.
Nevertheless, 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, according to the Australian Financial Review.
After Treasury Secretary Janet Yellen said on Tuesday that the U.S. banking system was sound despite recent pressure, Deputy Treasury Secretary Wally Adeyemo said a review of the failures of SVB 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,” Adeyemo said at an event hosted by the U.S. Hispanic Chamber of Commerce.
“We of course continue to monitor the current situation and consider what steps can be taken to further strengthen America’s financial stability,” he said, without elaborating.
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 March 28.
The Fed has said its review of SVB’s supervision will be finished by May 1 and released to the public.
Still, turbulence in financial markets and the banking system is likely to feature prominently in Fed chief Jerome Powell’s post-meeting news conference on Wednesday.