ECB Meets Over Banking Stress as US Rescue Eases Immediate Fears
European Central Bank supervisors met to tackle growing cracks in the banking system on Friday after a $30 billion lifeline for U.S. lender First Republic Bank (FRC.N) eased fears of its imminent collapse.
As reported on Reuters, large U.S. banks on Thursday swooped in to rescue the San Francisco-based bank, which was caught up in a widening shock triggered by the collapse of two other mid-size U.S. lenders.
The rescue package came less than a day after Credit Suisse (CSGN.S) clinched an emergency central bank loan of up to $54 billion to shore up its liquidity. Shares in Switzerland’s second-largest bank were lower in Friday morning trading.
The two deals helped restore some calm to global markets, after a torrid week for banking stocks.
“The Supervisory Board is meeting to exchange views and to provide members with an update on recent developments in the banking sector,” an ECB spokesperson told Reuters.
The ECB, which on Thursday raised interest rates by 50 basis points, held another ad hoc supervisory board meeting earlier this week in an unusual move ahead of a scheduled gathering next week.
“French and European banks are very solid,” ECB policymaker and French central bank governor Francois Villeroy de Galhau, told BFM business radio.
Analysts says authorities appear eager to quickly deal with systemic risks, but worry the potential for a full-blown banking crisis is far from over.
Data on Thursday showed 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.
The First Republic deal was put together by top power brokers including U.S. Treasury Secretary Janet Yellen, Federal Reserve Chairman Jerome Powell and JP Morgan Chase CEO Jamie Dimon, who had discussed the package this week, a source familiar with the situation said.
“They will keep the money in First Republic to keep it alive for self interest … to stop the run on banks. Then they will take it away gradually and the bank will play out a slow death,” Mathan Somasundaram, founder at research firm Deep Data Analytics in Sydney, said on Friday.
Some of the biggest U.S. banking names including JP Morgan Chase & Co (JPM.N), Citigroup Inc (C.N), Bank of America Corp (BAC.N), Wells Fargo & Co (WFC.N), Goldman Sachs (GS.N) and Morgan Stanley (MS.N) were involved in the rescue, according to a statement from the banks.
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 just how much it and others leaned on the Fed this month for support.
“People are concerned that the contagion risk is real, and that rattles confidence,” said Karen Jorritsma, head of Australian equities, RBC Capital Markets.
“I don’t think we are in the crux of a global financial crisis. Balance sheets are much better than they were in 2008, banks are better regulated,” she added.
Credit Suisse became the first major global bank to take up an emergency lifeline since the 2008 financial crisis amid doubts over whether central banks will be able to sustain aggressive rate hikes to rein in inflation.