Shares in US banks plummet as First Republic acquisition fails to calm market nerves
The Wall Street banking giants suffered a sell-off last night after its acquisition of US regional lender First Republic failed to calm market nerves.
The renewed unrest has increased pressure on the Federal Reserve, the central bank of the US, ahead of a decision this evening on whether or not to raise interest rates again, even as the crisis among lenders deepens.
Regional banks such as PacWest Bancorp and Metropolitan Bank, down 28 percent and 20 percent, suffered the biggest declines.
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But the jitters also spread to Wall Street heavyweights, including Bank of America, which fell 3 percent, Wells Fargo, 3.8 percent, and Citigroup, 2.7 percent.
In London, Barclays lost 3.1 percent, Standard Chartered fell 2.8 percent and smaller British lender Metro Bank lost 4.5 percent in value.
The FTSE 100 index fell 1.2 percent, or 97.54 points, to 7773.03 in a grim start to May trading, while New York’s Dow Jones fell 1.1 percent.
Fears that the US government could run out of money – due to a stalemate between the White House and Congress – and weaker-than-expected job data added to the concerns about the world’s largest economy.
That drove the dollar down and oil prices down 5 percent, with Brent crude trading at around $75 a barrel.
But it was JP Morgan’s rescue of San Francisco-based lender First Republic, in a deal brokered by US regulators, that created the biggest waves.
Rather than calming tempers, it seemed to intensify investors’ focus on who could be next. “Historically, as soon as you see an institution’s decision, the market tends to go after whoever they see as the next weakest link,” said Ryan Nash, regional banking analyst at Goldman Sachs.
Longbow Asset Management boss Jake Dollarhide said, “If a crisis of confidence can happen to First Republic, it can happen to any bank in this country.”
The broader crisis began in March with the collapse of US lenders Silicon Valley Bank, Signature and Silvergate. And it spread to Europe when Credit Suisse had to be bailed out by UBS.
New industry concerns arose when First Republic announced last week that it had suffered an £80bn exodus in customer deposits.
A bailout deal brokered over the weekend led JP Morgan boss Jamie Dimon to claim, “This part of the crisis is over.”
But the renewed turbulence suggested more trouble was ahead to put the spotlight on the Fed ahead of a rate decision tonight.
Despite the turbulence, it is widely expected to raise lending rates by another quarter of a percentage point as it fights inflation. But investors will be keenly on the lookout for signs of where the Fed is headed.
Thomas Hayes, chairman of Great Hill Capital, said yesterday’s turmoil in the markets showed that the central bank needs to signal a pause in rate hikes ‘otherwise you see continued turmoil in the banking system’.