After the emergency takeover of the major Swiss bank Credit Suisse by its competitor UBS, the turbulence in the financial sector eased somewhat. But there is still an acute emergency in the USA.
The situation at the struggling US regional bank First Republic remains precarious despite a concerted aid effort by the largest financial institutions in the United States. On Monday, the stock plummeted 47 percent to hit a record low of around $12.
While the financial markets stabilized overall after the emergency takeover of the ailing Credit Suisse by Swiss rival UBS at the beginning of the week, investor mistrust of individual banks is still high.
In particular, the First Republic Bank from San Francisco, whose shares have lost around 90 percent of their value since the beginning 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 – tried to prop up the faltering regional bank with uninsured deposits totaling $30 billion. The rescue plan was carried out in close coordination with the Ministry of Finance and the central bank. But the hoped-for liberation did not materialize.
US banking sector stress eased
Despite the relief effort, investors stocked up on a large scale on the options market with papers that are betting on a further drop in prices. According to US media reports, JPMorgan and the other major banks are already considering converting some of their deposits into a billion-dollar capital infusion 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 the rating agency Standard & Poor’s. Credit watchdogs say the $30 billion in deposits will alleviate acute liquidity pressures but may not solve the bank’s “significant” problems.
Aside from First Republic Bank, however, stress in the US banking sector eased significantly on Monday. Most of the other institutions counted by investors in the meantime recorded price increases. Since the bankruptcy of the crypto bank Silvergate and the collapses of Silicon Valley and Signature Bank threw the industry into chaos, the US banking sector has developed into a kind of two-tier society anyway. At times, deposits were shifted en masse from smaller institutions to large banks, which are subject to stricter capital regulations because of their systemic importance, which is perceived by financial regulators.
Part of the reason for this shift is that smaller regional finance houses are more likely to have accounts in excess of the $250,000 statutory insurance limit. The FDIC deposit insurance does not actually have to intervene here. In the case of Silicon Valley and Signature Bank, however, the US government issued a far-reaching guarantee to prevent a nationwide run on bank counters.
For other institutes, however, the situation is not yet entirely clear. According to the Wall Street Journal, around $70 billion was withdrawn from First Republic in just a few days – about 40 percent of the bank’s total deposits.
Study causes a stir
The so-called interest rate risk is at the heart of the banking crisis. For example, the Silicon Valley Bank had invested enormous sums in long-term and low-interest bonds, which are actually among the safest investments on the financial market. However, since the US Federal Reserve raised the key interest rate so quickly and significantly in the fight against high inflation, this portfolio lost value drastically.
This got the balance sheet out of control and ultimately triggered an immense withdrawal of customer funds due to liquidity concerns. So the big problem – unlike, for example, with the toxic mortgage securities of the 2008 financial crisis – was not the high and opaque credit risks, but poorly managed interest rate risks.
So far, the current turbulence has only affected individual banks – mostly with home-made problems. According to most experts, the situation is fundamentally different from previous wildfires in the financial system. Still, there are warnings of greater dangers still lurking on banks’ balance sheets.
A study that recently caused a stir assumes that almost 190 US banks are groaning under the high interest rate risks on their balance sheets. The analysis estimates the sum of customer deposits that may be at risk at around $300 billion. The researchers point out that Silicon Valley Bank was far from the worst capitalized bank in the US, and 10 percent of banks there have larger unrealized losses on their balance sheets.