First Republic becomes the latest bank to be rescued, this time by its rivals
Updated March 16, 2023 at 6:39 p.m. ET
The largest banks in the US are stepping in to bail out First Republic Bank.
A group of 11 lenders say they will inject $30 billion into the ailing mid-tier lender to prop it up.
Bank of America, Citigroup, JP Morgan Chase and Wells Fargo will each contribute $5 billion. Goldman Sachs and Morgan Stanley will each pledge $2.5 billion. Another $5 billion comes from five other banks.
The bailout comes after confidence in smaller lenders plummeted following the collapse of Silicon Valley Bank and Signature Bank in an extraordinary week.
The lenders said in a statement the action was meant to show their commitment to lenders like First Republic Bank.
“Regional, mid-sized and small banks are critical to the health and functioning of our financial system,” they said.
In a separate statement, Treasury Secretary Janet Yellen, Federal Reserve Chairman Jerome Powell, FDIC Chairman Martin Gruenberg and Acting Comptroller for the currency Michael Hsu commended the banks’ decision.
“This sign of support from a group of large banks is very welcome and shows the resilience of the banking system,” they said.
First Republic faced dwindling confidence in his health
The California-based First Republic has seen an exodus of depositors since the collapse of those two banks, as many of its customers have moved their money to larger competitors.
This comes even after the lender said it had provided $70 billion in new funding from both the Federal Reserve and the world’s largest bank, JP Morgan Chase. First Republic also noted that it has the right to request additional funds from the Fed if there is an increased demand for withdrawals.
The bank has also said that its balance sheet is solid and that depositors are safe, but investors have still worried that it is vulnerable to a deposit rush similar to that of Silicon Valley Bank.
Timothy Coffey, a managing director at brokerage firm Janney, said First Republic is known to be relatively conservative.
“It’s a very safe institution from a credit perspective,” he said. “They don’t make a lot of risky loans.”
First Republic had many unsecured deposits
Like SVB, First Republic was founded in California and caters to wealthy individuals and businesses.
On Wednesday, both Fitch Ratings and S&P Global Ratings downgraded First Republic’s credit rating.
In support of his decision, Fitch said the bank’s “focus on affluent and financially sophisticated customers in select US coastal urban markets” resulted in “a high proportion of uninsured deposits.”
The agency also hinted that First Republic customers would likely be taking their money elsewhere if the lender came under more pressure. Your deposits “may be less sticky in times of crisis or severe stress,” Fitch wrote.
According to analysis by S&P Global Market Intelligence late last year, 67.7% of First Republic’s domestic deposits were not insured by the FDIC — meaning they exceeded the regulator’s $250,000 limit.
A shock to the banking system
In the days since regulators shut down Silicon Valley Bank and Signature Bank, concerns about the health and safety of the banking system have grown.
Stocks of small, regional US banks were hit hard as investors feared other lenders could also collapse – although there was no evidence of system-wide problems.
And fears spread to other parts of the world.
On Wednesday, shares of Credit Suisse fell after its biggest investor announced it would stop lending money to the lender, which is facing very different problems and in the midst of a massive restructuring.
Shares of Switzerland’s second-largest lender rallied after the lender announced it would borrow up to $50 billion from the country’s central bank.
“What we have in the banking industry right now is a crisis of confidence,” Coffey said.
Treasury Secretary Yellen tried to calm markets during her testimony before the Senate Finance Committee on Thursday.
“I can assure the members of this committee that our banking system remains sound and that Americans can be confident that their deposits will be there when they need them,” she said.
Yellen defended the government’s response to the failures of SVB and Signature Bank, blaming a bank run for SVB’s collapse, accelerated by social media panic.
“It’s looking closely at what happened at the bank and what triggered the problem,” she said. “But the bank’s demise, the reason for its closure, was clearly that it could not meet depositors’ withdrawal requests.”
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