March 21 (Reuters) - Investors crept cautiously into bank stocks on Tuesday, with share prices including First Republic Bank's moving higher as immediate concerns about smaller U.S. lenders and further market ructions eased in the wake of the rescue of Credit Suisse.
After a tumultuous 10 days which culminated in the 3 billion Swiss franc ($3.2 billion) Swiss-regulator-engineered takeover of Credit Suisse by its rival UBS, attention has shifted to this week's meeting of the U.S. Federal Reserve.
But as concern over the health of U.S. mid-sized lenders lingers, Treasury Secretary Janet Yellen said the country's banking system was sound, despite recent pressure.
Yellen said she was committed to taking actions that would mitigate risks to financial stability and taking necessary steps to ensure the safety of deposits and the U.S. banking system.
The collapse of U.S. lenders Silicon Valley Bank (SVB) and Signature Bank triggered the demise of 167-year-old Credit Suisse and investors are concerned about potential financial time bombs ticking elsewhere in the system.
Yellen's reassurances were echoed in Britain by finance minister Jeremy Hunt, who said banks and the financial system there were well placed to cope with the problems, and by Swedish Central Bank Governor Erik Theeden.
"We should also feel secure in the fact that the authorities that have the job to deal with this are working closely together and are working with the government. So there is good capacity to act should this head into another phase," Theeden said.
The European Central Bank's top bank supervisor Andrea Enria said euro zone banks on average increased their capital ratio in the final quarter of last year and remain solid.
Earlier, he had warned banks against being "caught off guard" by rising interest rates, in remarks the ECB said were drafted in February, before recent market upheavals.
Worries about a new financial crisis contributed to a tumble in German investor sentiment in March, the ZEW economic research institute said.
In Switzerland, the Bankers Association said credit supply would not be restricted, adding it was convinced the Swiss banking sector still had a "prosperous future".
Credibility "is not destroyed, but it's not good," the association's chairman Marcel Rohner told a news briefing.
As the rescue of Credit Suisse assuaged the worst fears of systemic contagion, European bank shares (.SX7P) rose, while Asian stocks lifted off their lows.
Shares of beaten-down U.S. regional lenders climbed, including First Republic Bank (FRC.N) which was up 25%, while big U.S. banks such as JPMorgan, Citigroup (C.N) and Bank of America (BAC.N) also rose by around 3%.
The central bank to the world's central banks, the Bank for International Settlements, said it fully supported recent actions taken by the likes of the Swiss National Bank and Federal Reserve to address banking system problems.
"We support in full all the actions central banks have taken," the head of the BIS, Agustin Carstens, said.
'NEAR DEATH'
Another burning question is whether the Fed's relentless rate hikes, which some have blamed for sparking the biggest meltdown in the banking sector since the global financial crisis, might be at an end.
Policymakers from Washington to Europe have stressed that the turmoil is different from the crisis 15 years ago, saying banks are better capitalised and funds more easily available.
But the sudden shock means traders have now increased their bets the Fed will pause its hiking cycle on Wednesday to try to ensure financial stability, although they remain split over whether the central bank will raise its benchmark policy rate.
"The banking sector's near-death experience over the last two weeks is likely to make Fed officials more measured in their stance on the pace of hikes," said Standard Chartered head of G10 FX research, Steve Englander.
In a global response not seen since the height of the pandemic, the Fed at the weekend joined central banks in Canada, Britain, Japan, the euro zone and Switzerland in a co-ordinated action to enhance market liquidity.
Meanwhile, JPMorgan Chase & Co (JPM.N) CEO Jamie Dimon is leading talks with other big banks on new efforts to stabilise First Republic Bank (FRC.N), which last week had a $30 billion capital infusion, the Wall Street Journal reported.
First Republic and JPMorgan declined to comment on the report, which cited people familiar with the matter.
A spokesperson for First Republic pointed to an earlier statement where the bank said it was "well-positioned to manage short-term deposit activity".
In Europe, the investor focus has shifted to the massive blow some Credit Suisse bondholders will take, prompting euro zone and British banking supervisors to try to stop a rout in the market for convertible bank bonds.
The regulators said owners of this type of debt would only suffer losses after shareholders have been wiped out - unlike at Credit Suisse, whose main regulators are in Switzerland and whose AT1 prospectus made clear that hybrid (AT1) holders would not recover any value.
Nevertheless, lawyers are talking to a number of AT1 bond holders about possible legal action, law firm Quinn Emanuel Urquhart & Sullivan said on Monday.
Danske Bank has advised its private clients not to invest in high yield bonds, citing the risk of substantial capital losses as credit conditions tighten.
The category of high yield bonds includes both corporate and bank bonds, including the AT1 bonds that Credit Suisse will have to write down to zero on the orders of the Swiss regulator as part of the bank's rescue merger with UBS.
European Union authorities will never write off bank bonds before shares are wiped out, whether a bank is being wound down or there are "private solutions" to rescue it, the ECB's Enria said on Tuesday.
($1 = 0.9280 Swiss francs)
