On Friday, European Central Bank (ECB) supervisors met to address the growing cracks in the banking system, following the $30 billion bailout for First Republic Bank. The rescue package was provided by large US banks and helped to ease fears of the bank’s collapse. The deal was put together by top power brokers, including US Treasury Secretary Janet Yellen, Federal Reserve Chairman Jerome Powell, and JP Morgan Chase CEO Jamie Dimon. While the support has prevented an imminent collapse, investors were startled by late disclosures about First Republic’s cash position, even after the injection, and how much it and others relied on the Fed for support.
Credit Suisse also secured an emergency central bank loan of up to $54 billion to shore up its liquidity, and shares in Switzerland’s second-largest bank were lower in Friday morning trading. The two deals helped to restore some calm to global markets, following a torrid week for banking stocks. The ECB, which raised interest rates by 50 basis points on Thursday, held another ad hoc supervisory board meeting earlier this week in an unusual move ahead of a scheduled gathering next week. ECB policymaker and French central bank governor Francois Villeroy de Galhau reassured investors that French and European banks were very solid, stating this on BFM business radio.
While authorities appear eager to quickly deal with systemic risks, analysts are worried that the potential for a full-blown banking crisis is far from over. Data on Thursday showed that banks in the United States sought record amounts of emergency liquidity from the Fed in recent days, driving up the size of the central bank’s balance sheet after months of contraction.
Focus now swings to the Fed’s policy decision next week, and whether it will stick with its aggressive interest rate hikes as it seeks to get inflation under control. In Asia, Singapore, Australia, and New Zealand said they were monitoring financial markets, but were confident their local banks were well-capitalised and able to withstand major shocks. Japanese financial authorities will meet to discuss developments.
Banking stocks globally have been battered since Silicon Valley Bank collapsed last week due to bond-related losses that piled up when interest rates surged last year. This raised questions about what else might be lurking in the wider banking system. European banks have lost around $165 billion in market value since March 8, according to Refinitiv data.
