Biggest US banks deposit $30bn in First Republic to shore up liquidity

The rescue is an extraordinary effort to protect the entire banking system from widespread panic by turning the bank into a firewall.

A San Francisco police officer sits parked in his car in front of First Republic Bank headquarters. Picture: AFP.

Eleven US banks have deposited $30 billion in First Republic Bank, according to a joint statement from the heads of the Treasury, Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.

“This show of support by a group of large banks is most welcome, and demonstrates the resilience of the banking system,” the federal officials said.

The biggest banks in the U.S. earlier discussed a joint rescue totaling more than $25 billion to shore up the beleaguered lender, people familiar with the matter said. JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp. and Wells Fargo & Co. were in talks to deposit $5 billion of their own money each into First Republic, the people said. Morgan Stanley and Goldman Sachs Group Inc., as well as regional banks U.S. Bancorp, PNC Financial Services Group Inc. and Truist Financial Corp. were to kick in smaller amounts, the people said.

The details were still being worked out, and the banks had discussed the plan with officials and regulators in Washington, D.C., the people said.

First Republic stock skyrocketed into the green almost immediately as the major banks shored up its liquidity. Regional banks reversed positive following the First Republic Bank news. Larger banks pared losses after their retreat on Wednesday.

Treasury Secretary Janet Yellen assured Congress that the banking system remains strong during testimony Thursday. Meanwhile, bank stocks leaned toward another day of losses Thursday after US financial institutions took a beating Wednesday.

Secretary Yellen is set to testify before the Senate Finance Committee beginning at 10 a.m. ET. She is expected to tell Congress “that our banking system remains sound, and that Americans can feel confident that their deposits will be there when they need them,” according to prepared remarks. Ms Yellen will also highlight Federal Reserve and FDIC plans to support the banking system, including the new lending facilities.

Big banks received an influx of billions of deposits from midsize lenders including First Republic over the past week in the wake of the collapse of Silicon Valley Bank. The deal could be structured in such a way that the banks are effectively giving back some of the money they have raked in from panicky First Republic depositors, some of the people said.

Any rescue deal could solve First Republic’s immediate issues of a falling stock price and fleeing depositors. But the bank will still have to grapple with a tougher business environment in a world of higher interest rates and depositors suddenly aware of the pitfalls of large uninsured balances.

First Republic Bank is displayed on a monitor on the floor of the New York Stock Exchange. Picture: Getty Images via AFP.

The rescue would be an extraordinary effort to protect the entire banking system from widespread panic by turning First Republic into a firewall. Two banks have already failed in the past week after depositors withdrew billions, and fears have grown that First Republic could be next.

First Republic’s stock has been pummelled for days and fell sharply Thursday morning over concerns about the bank’s health in the wake of the collapse of Silicon Valley Bank. The stock reversed its Thursday loss and was recently up about 15 per cent in afternoon trading after The Wall Street Journal reported the plan.

Silicon Valley Bank’s collapse last week sparked concerns about other regional banks with large collections of uninsured deposits. First Republic also catered to a similar Bay Area clientele as the failed bank.

Customers yanked billions of deposits out of First Republic and the bank over the weekend sought to stem the tide with a deal, announced Sunday, involving additional funding from the Federal Reserve and JPMorgan that gave the bank a total of $70 billion in available liquidity.

The bank has maintained it is stable and that deposit losses aren’t overwhelming, people familiar with the matter have said.

But S&P Global Ratings on Wednesday downgraded the bank’s bonds to junk status and investors continued selling, adding more uncertainty.

The bank’s stock is down more than 60 per cent this week. Its market capitalisation has fallen from $21 billion on March 8, when the SVB crisis began, to about $5 billion.

The fast-moving situation is reminiscent of the drama in the banking system in the 2008 financial crisis, when JPMorgan and its Chief Executive, Jamie Dimon, played the role of white knight, purchasing Bear Stearns and then Washington Mutual. Lawsuits, losses and political pressure followed. Mr. Dimon has said he would never do a government-led rescue deal again.

First Republic’s business and stockmarket valuation were long the envy of the banking industry. Its customers are wealthy individuals and businesses, primarily on the coasts. Its lending business revolves around making huge mortgages to clients like Mark Zuckerberg. Few of those loans ever went bad. The bank had about $213 billion in assets as of the end of 2022.

The bank’s profits rose in 2022, but the Fed’s aggressive rate increases took a toll. First Republic’s wealthy customers were no longer as content to leave huge sums of money in bank accounts that earned no interest.

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