Pressure back on US lender First Republic as European bank fears ease

Shares fall by as much as 50%

There are fears that First Republic Bank will need a second rescue.

Shares of US lender First Republic tumbled as much as 50% on Monday on fears it will need a second rescue to stay afloat, bucking a relief rally in banking shares driven by UBS Group's state-backed takeover of Credit Suisse.

Less than a week after large US banks pumped $30bn in deposits into the mid-size US lender, investors dumped First Republic on worries that infusion of capital would not be enough. 

Ratings firm S&P Global also downgraded it deeper into junk status, citing liquidity risks.

JPMorgan Chase chief executive Jamie Dimon is leading talks with other big banks on new efforts to stabilise First Republic with a possible investment into the lender, the Wall Street Journal reported. 

The tumult at First Republic overshadowed an otherwise positive day for banking stocks globally, led by relief that UBS Group's takeover of 167-year-old Credit Suisse would avert a wider banking crisis. 

"First and foremost, the Credit Suisse, UBS merger certainly takes a lot of stress out of the global banking system," said Art Hogan, chief market strategist at B Riley Wealth.

The €3bn deal for the troubled Swiss bank — which was once worth more almost €90bn — was engineered by Swiss regulators and announced on Sunday night.

European bank shares, including those in Ireland, rebounded from recent losses, while on Wall Street the S&P 500 banks index recovered. Regional US lenders also rose.  

Bonds issued by major European banks fell after some Credit Suisse bondholders were wiped out in the deal, but UBS shares closed slightly higher, bouncing from a 16% slump triggered by concerns about the long-term benefits of the deal and the outlook for Switzerland, once considered a paragon of sound banking. 

The turmoil that gripped banks over the past week was triggered by the collapse of US mid-sized lenders Silicon Valley Bank and Signature Bank, quickly ensnared Credit Suisse in Europe.

Attention is now turning to the US Federal Reserve, whose relentless rate hikes to quash inflation were seen as a trigger for the turmoil.

Traders have now increased their bets that the central bank will pause its hiking cycle on Wednesday to try to ensure financial stability. 

Reuters