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Banking sector rescue efforts soothe investor anxiety for now

Stocks rose Monday, though investors watched for signals from the Fed on the central bank’s interest rate tightening plans

UBS’s takeover of Credit Suisse was engineered by the Swiss government. (Pascal Mora/Bloomberg News)
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U.S. and European efforts to stabilize banking systems appeared to calm investors about the crisis as markets posted gains Monday.

UBS, Switzerland’s biggest bank, said over the weekend that it would purchase troubled rival Credit Suisse for $3.25 billion in a deal brokered by the country’s government. A few days earlier, some of the largest U.S. banks agreed to deposit $30 billion into one of the technology industry’s favored financial institutions, First Republic Bank, to shore up its stock after Silicon Valley Bank’s collapse.

On the heels of those moves, stocks rose Monday, though investors kept a sharp lookout for signals from the Federal Reserve on the central bank’s interest rate tightening regime. Fed officials are set to meet Tuesday and Wednesday, and before the tremors in the banking sector, Fed Chair Jerome H. Powell had said another rate boost was likely. Now those plans could be on hold as financial regulators assess uncertainty across the global economy, and ripples of bank failures — and narrowly averted collapses — from the past two weeks.

“In some ways, things have calmed down a bit, but if [regulators] are feeling like, ‘Now it’s First Republic Bank … and there are other banks that are in the pipeline,’ we’re not out of the woods,” said Reena Aggarwal, director of the Psaros Center for Financial Markets and Policy at Georgetown University.

The Dow Jones industrial average and S&P 500 each gained about 1 percent by the closing bell, as some investors’ fears seemed to subside after the weekend agreement, while the tech-heavy Nasdaq composite index was essentially flat after clawing back earlier losses for a 0.4 percent boost.

European markets moved higher in choppy trading, with the Pan-European Stoxx 600 index climbing nearly 1 percent, Britain’s FTSE 100 gaining 0.93 percent and Germany’s DAX adding 1.12 percent. But Asian markets slumped, with Hong Kong’s Hang Seng Index tumbling 2.7 percent and Japan’s Nikkei shedding 1.4 percent.

“I think that if [investors] are not banking on the rate cycle being over, they’re thinking it might soon be over,” said Sam Stovall, chief investment strategist at CFRA Research.

The global banking sector has been in upheaval for the past 10 days, after Silicon Valley Bank failed and regulators stepped in. That collapse led to greater scrutiny of other financial institutions in the United States and abroad, and tech-heavy Signature Bank was closed shortly thereafter.

After taking a beating last week, regional banks rebounded Monday. Los Angeles-based PacWest Bancorp jumped 11.75 percent in afternoon trading. Fifth Third Bancorp in Cincinnati rose 6.57 percent. Zions Bancorp of Salt Lake City gained 1.87 percent.

But First Republic’s stock has continued to fall, down 37.42 percent Monday to trade at $14 per share, and some of the institutions involved in last week’s moves are discussing a potential rescue plan that involves a direct investment, the Wall Street Journal reported.

The uneasiness in the banking sector puts financial regulators in a bind. Many observers have said the Fed’s rate increases contributed to the troubles at SVB and Signature.

High interest rates had outsize effects on technology companies, which need a steady stream of liquidity to make investments and meet payroll costs. That caused tech and start-up firms to draw down their deposits at SVB, which had placed much of its cash in Treasury bonds that fell in value as higher yield notes came on the market.

But the rate increases were also relatively successful at taming inflation, which has vexed U.S. consumers for close to two years.

Inflation eased for a seventh consecutive month in January, to 6.4 percent from a peak of 9.1 percent, but it’s falling at a slower rate than many regulators would like. That provides impetus, Stovall said, for another rate increase, especially since other leading metrics — such as retail sales and unemployment numbers — point to a strong economy.

“Inflation remains a problem,” he said. “The Fed does not want to send the signal that it is panicking because of the bank closures, but at the same time it doesn’t want to go overboard by raising rates by 50 basis points.”

Government officials have tried to quell fears in the banking market, assuring depositors that their money would be accessible and issuing public statements that the smaller banks’ failures did not mean the larger market was at risk.

Still, concern has rippled across the sector as customers, anxious about their savings, moved their money to bigger banks.

The Federal Deposit Insurance Corp. said Monday there was “substantial interest from multiple parties” to acquire the SVB bridge bank officials set up. The FDIC extended the bidding period for more vetting time for the offers, and will allow parties to submit separate bids for the bridge bank and subsidiary Silicon Valley Private Bank. That’s a good thing for market stability, Aggarwal said, because it shows there are still parts salvageable from the failed institutions.

Credit Suisse, by contrast, had been struggling for years after chronic mismanagement, compliance issues and a critical data breach caused it to lose about $8 billion in the past year alone.

The takeover announced Sunday was engineered by the Swiss government, capping several days of speculation over its fate.

“The Credit Suisse Group is experiencing a crisis of confidence, which has manifested in considerable outflows of client funds,” the Swiss government’s financial regulator, FINMA, said in a release Sunday. “This was intensified by the upheavals in the U.S. banking market in March 2023.”

As part of the UBS takeover, the Swiss government said its support would “trigger a complete write-down” of about $17 billion worth of Credit Suisse debt held in contingent convertible bonds.

The bonds, used in Europe, can sometimes be converted into equity and sometimes be written down. But in this case, bondholders are angry that their bonds would be written down while shareholders receive a payout, according to Bloomberg News.

That, in turn, could cause wariness in the contingent convertible bond market, which debuted in Europe after the global financial crisis as a way to push the risk of losses onto bondholders instead of taxpayers, according to the Wall Street Journal.

David J. Lynch, Amy B Wang, Jeff Stein, Abha Bhattarai, Rachel Seigel and Tony Romm contributed to this report.