Written by: Susannah Streeter | Hargreaves Lansdown
- First Republic shares plunge 27% after extent of deposit flight becomes clear and 25% of workforce is set to be axed.
- UK listed banks dragged down by negative sentiment as worries swirl about another potential banking collapse.
- Executive director of markets at the FCA warns the watchdog needs new powers as crypto investing increases year on year.
Unease is spreading across the banking sector again, sparked by the sinking realisation of the scale of deposit flight suffered this year and the worry that the problem is not yet at an end. Shares in First Republic Bank plunged at the open on Wall Street after the extent of the run on the bank became clear, with customers pulling more than $100 billion from their accounts in the first quarter. Sentiment is downbeat across the sector, particularly as First Republic’s bleak situation has been painted so soon after Credit Suisse revealed just how large its black hole was yawning before its collapse and warned the trend of outflows had not yet reversed.
It seems the lifeline thrown to First Republic by large lenders hasn’t stopped confidence sinking. With almost a quarter of the workforce being axed and a quick-fire asset sale getting underway, investors are sensing panic and fleeing the stock and worries are rising about another banking collapse.
The downbeat sentiment has prompted falls in shares in UK listed banks including Barclays, HSBC, Lloyds, and NatWest. Even though banks have been benefiting from a rise in net interest margins, thanks to the cycle of rate hikes, there is expectation that they will be forced to attract more deposits by offering better rates, eating into profits. Although systemic risk to the banking sector is still considered to be low, the chaotic nature of events which unfolded has clearly unsettled central bankers. The Bank of England is already looking to improve the UK deposit scheme, to ensure depositors are paid back more efficiently and potentially increase the amount of money which is protected.
As worries about contagion continue to plague the traditional banking sector, the risks of crypto are again being drummed home by the city watchdog the FCA although it’s clear the door is opening to bring digital coins and tokens under the regulatory sphere. Sarah Pritchard, executive director of markets at the FCA has stressed in a speech that crypto assets offer opportunities for more efficient and innovative financial services and products and should be explored. But it’s clear the watchdog’s hands are tied without fresh government legislation giving it more power to regulate the crypto wild west. Time is of the essence given the numbers of investors who are piling in, despite the chill winds which blew on crypto asset prices during the crypto winter, which appears to be thawing. The take up of crypto is on the rise year-on-year, with 67% of European institutional investors holding crypto and one in ten adults in the UK having owned digital coins or tokens at some point. However, with so little protection they risk getting their fingers seriously burnt at a time when fraud is so rife and high-profile collapses like FTX demonstrate the lack of transparency within the industry. Relentless warnings about the dangers of pouring money into high-risk investments are clearly not working, and with crypto turning mainstream, the regulator needs more powers to help police the space.
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