On Wednesday, global markets were unsettled due to the escalating concerns about a possible banking crisis in the US, exacerbating the broader fears of significant risks to the world economy.
First Republic Bank (NYSE: FRC) was again in the spotlight as reports emerged that regulators in Washington and financiers on Wall Street were scrambling to devise a plan to stabilize the struggling bank.
The California-based lender’s stock price plummeted by a further 49% on the day after it revealed that its customers had withdrawn $100 billion of deposits during last month’s turmoil.
Meanwhile, executives refused to take analysts’ questions and withdrew financial guidance for the year. The Financial Times reported that the bank was struggling to find a viable solution, such as a sale of all or part of the bank. Additionally, Reuters reported that the bank was sued by shareholders who accused it of concealing the threat posed by rising interest rates to its business model.
The FT further added that the bank was in touch with the US government, which was on high alert following the failure of Silicon Valley Bank and Signature Bank last month.
Potential options being discussed included a rescue deal from one of the large US banks that recently deposited $30 billion into the First Republic, or for the Federal Deposit Insurance Corporation to take control of the institution and offer a government guarantee for all deposits, as it did with SVB.
The concern is that the crisis could spread to other US regional banks, although there are some indications that this may not be the case
Following Wall Street’s lead, European stocks suffered losses, triggered by the sharp decline in First Republic shares after it announced a rescue plan involving a potential asset sale of up to $100 billion of long-dated mortgages and securities.
The move has raised fresh apprehensions over the health of the US banking sector. ACY Securities’ chief economist, Clifford Bennett, stated that the risk of a banking crisis was still looming, along with Russia’s advanced missile systems, higher China-US tensions, more sanctions on Russia and China, the likely unwinding of global trade, and the resurgence of higher inflation, all of which make the risks substantial.
Credit Suisse Group AG’s Asia Pacific chief investment officer, John Woods, added that the markets may not have fully factored in the economic slowdown presently playing out in the US.
In early trading, the FTSE 100 declined by 0.37%, while the CAC 40, DAX, and Euro Stoxx 50 were also in the negative territory. The European Central Bank policymakers’ upcoming remarks could provide insight into the central bank’s extent of monetary tightening measures.
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