RPT-WRAPUP 1-European bank shares fall as crisis leaves mark

(Repeats with no changes to text) By Howard Schneider, Aniruddha Ghosh and John Revill March 22 (Reuters) - Banking shares slipped in Europe on Thursday as the instability that surged through the global banking system this month is prompting investors to adjust to more challenging economic and lending conditions ahead. The Federal Reserve on Wednesday indicated it was on the verge of pausing further increases in borrowing costs after the collapse of two U.S. lenders earlier this month triggered worries of contagion throughout the banking system. Fed Chair Jerome Powell said the banking industry stress could trigger a credit crunch with "significant" implications for a slowing U.S. economy. The turmoil that began in the United States spread quickly around the globe, ensnaring one of Europe's biggest banking names in 167-year-old Credit Suisse AG , which was forced into a shotgun marriage with Swiss peer UBS Group to avert a wider crisis. Citigroup downgraded Europe's banking sector on Thursday, warning the rapid pace of interest rate hikes will further weigh on economic activity and lenders' profits. "The European banking sector's fundamentals look healthy. But the ongoing confidence crisis could limit banks' risk appetite and reduce the flow of credit," Citigroup equity strategists led by Beata M Manthey said. The index of top European banks was down 1% in early trading, with German banking giants Deutsche Bank and Commerzbank both falling 0.8%. The rescue of Credit Suisse, which followed the collapses of California-based Silicon Valley Bank (SVB) and New York-based Signature Bank ignited broader concerns about investors' exposure to a fragile banking sector. Switzerland's financial market regulator FINMA on Thursday defended its decision to impose steep losses on some of Credit Suisse bondholders as part of its rescue, saying the decision was legally watertight. The decision to prioritise shareholders over Additional Tier 1 (AT1) bondholders rattled the $275 billion AT1 bond market and some Credit Suisse AT1 bondholders are seeking legal advice. The convertible bonds were designed to be invoked during rescues to prevent the costs of bailouts falling onto taxpayers as it happened during the global financial crisis in 2008.

"The AT1 instruments issued by Credit Suisse contractually provide that they will be completely written down in a 'viability event', in particular if extraordinary government support is granted," FINMA said.

NO BLANKET SUPPORT

U.S. authorities have jumped to stem the turmoil this month by protecting the depositors of tech-focussed SVB, but U.S. Treasury Secretary Janet Yellen rejected expanding that protection more widely. Yellen told lawmakers on Wednesday that she has not considered or discussed "blanket insurance" for deposits without approval by Congress. Her comments further pressured shares of beleaguered First Republic Bank , which lost much of its market value since the collapse of SVB and Signature Bank and which is speaking to peers and investment firms about potential deals. Yellen's remarks came as Powell sought to reassure investors about the soundness of the banking system, saying that the management of SVB "failed badly," but that the bank's collapse did not indicate wider weaknesses in the sector. "These are not weaknesses that are running broadly through the banking system," the Fed chair said, adding that the takeover of Credit Suisse seemed to have been a positive outcome. The Fed's relentless rate hikes to rein in inflation are among factors blamed for the biggest banking sector meltdown since the 2008 financial crisis. "The Fed is now living on a hope and a prayer that they haven’t done irreparable harm to the banking system," said Brian Jacobsen, senior investment strategist at Allspring Global Investments in Menomonee Falls, Wisconsin. "The Fed is probably thinking financial stresses are substituting for future rate increases." As officials grapple with restoring confidence in the banking system, JPMorgan Chase & Co CEO Jamie Dimon is scheduled to meet with Lael Brainard, the director of the White House's National Economic Council, during the executive's planned trip to Washington, according to a person familiar with his plans.

BANK SUPERVISION Policymakers from Washington to Tokyo have stressed the turmoil is different from the crisis 15 years ago, saying banks are better capitalised and funds more easily available. However, some watchers think the banking system is more vulnerable to rumour and rapid moves in an era of widespread social media use, posing a challenge for regulators trying to tamp down instability. Social media is a "complete game-changer" in bank runs, Citigroup Inc chief executive Jane Fraser told the Economic Club of Washington D.C. on Wednesday.

($1 = 0.9280 Swiss franc) <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Credit Suisse, UBS deal: What you need to know FACTBOX-Banking turmoil may prompt Fed to go slow on interest rate hikes - EXPLAINER-Credit Suisse: How did it get to a crisis point EXPLAINER-Why markets are in uproar over a risky bank bond known as AT1 TIMELINE-How Credit Suisse has evolved over 167 years GRAPHIC-Bank deposits turn lower GRAPHIC-Majority of Americans oppose a bank bailout GRAPHIC-SVB, Signature Bank are first bank failures since 2020 ANALYSIS-UBS swallows doomed Credit Suisse, casting shadow over Switzerland ANALYSIS-Social media-driven bank runs burden regulators with a bigger problem ANALYSIS-Asset concerns weigh on U.S. regional bank deal talks ANALYSIS-As worries over banks swirl, investors seek protection against market crash ANALYSIS-Credit Suisse rescue presents 'buyer beware' moment for bank bondholders ANALYSIS-Market turmoil is doing central bankers' jobs for them NEWSMAKER-Ralph Hamers, the Dutchman thrust in the driver's seat at Swiss bank UBS GRAPHIC-Credit Suisse rescue Over $95 billion in market value wiped out in 2 weeks Traders bet on rate hike as fears of bank crisis ease Market turmoil may do ECB's work in dampening demand - Lagarde Credit Suisse collapse threatens Switzerland's wealth management crown BREAKINGVIEWS-Credit Suisse bump trade looks over-optimistic BREAKINGVIEWS-Bank woes expose gaps in EU safety net BREAKINGVIEWS-Fed’s self-scrutiny starts off on the wrong foot INSTANT VIEW 3-SVB-focused Fed hikes rates 25 bp, suggests one more on horizon [INSTANT VIEW 3-SVB-focused Fed hikes rates 25 bp, suggests one more on horizon] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Reuters bureaues; Writing by Toby Chopra Editing by Tomasz Janowski)