European Central Bank supervisors see no contagion for euro zone banks from recent sector turmoil, a source said on Friday, after U.S. lenders threw First Republic Bank (FRC.N) a $30 billion lifeline and tapped record amounts from the Federal Reserve.
Large U.S. banks on Thursday swooped in to rescue the San Francisco-based lender, which was caught up in market volatility triggered by the collapse of two other mid-size U.S. banks.
The rescue package came shortly after embattled Credit Suisse (CSGN.S) tapped an emergency central bank loan of up to $54 billion to shore up its liquidity.
Shares in Switzerland’s second-largest bank fell again on Friday despite the move, with First Republic’s shares indicated 12% lower in U.S. pre-market trading.
The ECB held an ad hoc supervisory board meeting, its second this week, to discuss the stresses and volatility in the banking sector in an unusual move ahead of a scheduled one next week.
But the supervisors saw no contagion to euro zone banks from the market turmoil, a source familiar with the meeting’s content told Reuters, adding they were told deposits were stable across the sector and Credit Suisse exposure was immaterial.
An ECB spokesperson declined to comment.
Euro zone banks are still sitting on some 4 trillion euros ($4.25 trillion) worth of excess liquidity, which they are even keen to hand back to the ECB now that borrowing from it has become more expensive, as central bank data showed on Friday.
A German government spokesperson said the current situation with European banks is not comparable to the 2008 financial crisis, adding during a regular news briefing that there is no cause for concern about the country’s banking sector.
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 financial system.
While the two deals and action by policymakers have helped restore some calm, analysts and investors are still concerned about the potential for a full-blown banking crisis.
The scale of stress was underscored by data on Thursday showing banks in the U.S. 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 power brokers including U.S. Treasury Secretary Janet Yellen, Fed Chairman Jerome Powell and JP Morgan CEO Jamie Dimon, 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 First Republic’s late disclosures on its cash position and just how much emergency liquidity it needed.
“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.
LESSONS FROM 2008
For now, authorities are confident the banking system is resilient and have tried to emphasise that the current turmoil is different to the global financial crisis 15 years ago as banks are better capitalised and funds more easily available.
The ECB pressed forward with its 50 basis point rate hike, arguing that euro zone banks were in good shape and that if anything, higher rates should bolster their margins.
Focus now swings to the Fed’s policy decision next week and whether it will stick with its aggressive interest rate hikes as it seeks to get inflation under control.
Japan’s Prime Minister Fumio Kishida said after a three-way meeting between the country’s government, banking regulator and central bank that the talks were held as part of efforts to closely watch any impact on financial system stability.
“Japan’s financial system remains stable as a whole,” Kishida told a news briefing.
Singapore, Australia and New Zealand also said they were monitoring financial markets but were confident their local banks were well capitalised and able to withstand major shocks.
While capital remains adequate, analysts say a A$300 billion ($201 billion) refinancing task for Australia’s biggest banks is about to get harder, as appetite for new debt shrinks.
