Major US banks inject $30 billion to rescue First Republic Bank

"By having the largest banks in the US inject liquidity directly into the First Republic, we are seeing a route to the bank receiving liquidity outside of the mechanisms of government," said Thomas Wade, director of financial policy at the American Action Forum in Washington. "We don't know enough as of yet exactly how the large banks have been encouraged to perform this lifesaving manoeuvre."

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, raising questions about what else might be lurking in the wider banking system.

Within days, the market turmoil had ensnared Swiss lender Credit Suisse (CSGN.S), forcing it to borrow up to $54 billion from Switzerland's central bank to shore up liquidity.

Some of the biggest US banking names including JPMorgan 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.

A round of financing on Sunday raised through JPMorgan had given First Republic access to $70 billion in funds. But that failed to calm investors as worries of a contagion deepened with the demise of Signature Bank to follow that of SVB and depositors began moving cash to larger lenders.

Policymakers have tried to emphasize that the current turmoil is different from the global financial crisis 15 years ago as banks are better capitalized and funds more easily available.

But central bank data on Thursday also showed that banks sought record amounts of emergency liquidity from the Federal Reserve in recent days, driving up the size of the Fed's balance sheet after months of contraction.

"I don't see there being an obvious risk of widespread systemic collapse or I don't see this as being particularly indicative of weakness in the banking sector," said Wade. "Having said that, we know that one of the key reasons why particularly Silicon Valley Bank went under was as a result of interest rate movements on their long-term Treasuries. And the simple fact of the matter, all of the large banks are exposed to that. All of their large banks took on these long-term Treasuries during the pandemic when money was essentially free. It is no longer free."

First Republic Bank's stock closed up 10% on news of the rescue but its shares fell 18% in after-market trading after the bank said it would suspend its dividend.

Reuters