By David French, Nupur Anand and Lananh Nguyen
(Reuters) - Shares of U.S. regional lenders including battered First Republic Bank surged on Tuesday as fears of a wider banking crisis abated and investors turned their focus to the U.S. Federal Reserve's next move.
The Fed's relentless rate hikes to rein in inflation have been partly blamed for sparking the biggest meltdown in the banking sector since the 2008 financial crisis, and traders are split over whether the central bank will be forced to pause its hiking cycle on Wednesday to ensure financial stability.
The tumultuous 10 days for banks that culminated in the 3 billion Swiss franc ($3.2 billion) Swiss regulator-engineered takeover of Credit Suisse (SIX:CSGN) by rival UBS were triggered by the collapse of Silicon Valley Bank, which sank under the weight of bond-related losses due to a surge in interest rates last year.
"The banking sector's near-death experience over the last two weeks is likely to make Fed officials more measured in their stance on the pace of hikes," said Standard Chartered (LON:STAN) head of G10 FX research, Steve Englander.
Worries over the health of midsized U.S. lenders linger, particularly First Republic Bank. But Credit Suisse's rescue appeared to have assuaged the worst fears of systemic contagion, boosting shares of European banks and U.S. regional lenders.
After surging as much as 60% during Tuesday's session, First Republic shares ended 29.5% higher, recovering some of their deep losses over the past two weeks, while larger U.S. banks also rallied. First Republic has shed 80% of its market value this month, even after Tuesday's rebound.
US Bancorp (NYSE:USB) jumped almost 9%, while JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C), Wells Fargo (NYSE:WFC) and Bank of America (NYSE:BAC) all climbed more than 2%.
The S&P 500 banks index rallied 3.6%, its largest one-day gain since November.
First Republic is looking at ways it can downsize if its attempts to raise new capital fail, three people familiar with the matter told Reuters. JPMorgan Chase has been helping the bank find new sources of capital after a $30 billion injection of deposits from big banks failed to stem fears over its viability.
The bank is examining how it can sell parts of its business, including some of its loan book, in a bid to raise cash and cut costs, one source familiar with the situation said.
A sale of loans to other parties, including private equity firms, is one option under consideration, two of the sources said. While a sale of the entire bank remains possible, First Republic is focused on raising capital, the third source said.
The scenarios were being discussed as major bank chief executives gathered in Washington for a scheduled two-day meeting starting Tuesday, sources familiar with the matter said.
'FEEL SECURE'
Policymakers from Washington to Tokyo have stressed the current turmoil is different from the crisis 15 years ago, saying banks are better capitalised and funds more easily available.
In the latest effort to calm jitters, U.S. Treasury Secretary Janet Yellen said the country's banking system was sound despite recent pressure.
Yellen said she was committed to taking actions that would mitigate risks to financial stability and taking necessary steps to ensure the safety of deposits and the U.S. banking system.
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.
Yellen's reassurances were echoed in Britain by Finance Minister Jeremy Hunt, who said banks and the financial system there were well-placed to cope with the problems, and by Swedish Central Bank Governor Erik Thedeen.
"We should also feel secure in the fact that the authorities that have the job to deal with this are working closely together and are working with the government. So there is good capacity to act should this head into another phase," Thedeen said.
The European Central Bank's top bank supervisor Andrea Enria said euro zone banks on average increased their capital ratios in the final quarter of last year and remain solid, adding that funding and liquidity positions were not "materially affected" by the Credit Suisse crisis.
Traders bet on rate hike as fears of bank crisis ease Traders bet on rate hike as fears of bank crisis ease, https://www.reuters.com/graphics/USA-RATES/FEDWATCH/xmpjkbnxmvr/chart.png
Worries about a new financial crisis contributed to a tumble in German investor sentiment in March, the ZEW economic research institute said.
Over $95 billion in market value wiped out in 2 weeks, https://www.reuters.com/graphics/GLOBAL-BANKS/USA/myvmobkeovr/graphic.jpg
The investor focus in Europe also shifted to the massive blow some Credit Suisse bondholders will take, prompting euro zone and British banking supervisors to try to stop a rout in the market for convertible bank bonds.
Additional Tier 1 bonds, or AT1s, are issued by banks to help them make up the capital buffers which regulators require them to hold. They can be converted into equity but until they are, they do not dilute a lender's share capital.
At Credit Suisse, whose main regulators are in Switzerland, its AT1 prospectus made clear that holders would not recover any value. Nevertheless, lawyers are talking to a number of AT1 bond holders about possible legal action, law firm Quinn Emanuel Urquhart & Sullivan has said. Law firm Pallas Partners also said it and a Swiss counsel are working on possible legal action for some Credit Suisse bond investors whose holdings were wiped out.
Swiss authorities also imposed curbs on bonus payments for Credit Suisse employees, a move that penalises bankers after the state-backed takeover.
GRAPHIC-Credit Suisse rescue, https://www.reuters.com/graphics/GLOBAL-BANKS/myvmobgwyvr/chart.png
($1 = 0.9280 Swiss franc)