Private bailout for First Republic Bank. A total of 11 major banks in the United States, led by JP Morgan, have decided to lend a hand and come to the rescue of the country’s 14th largest bank by assets. The San Francisco-based First Republic is the entity most similar in size and geography to the fallen Silicon Valley Bank (SVB). The operation was carried out under the auspices of the authorities and involves the injection of around $30,000 million in deposits (just over €28,000 million at current exchange rates).
“Today, 11 banks announced deposits worth $30 billion at First Republic Bank. This statement of support from a group of large banks is very welcome and demonstrates the resilience of the banking system,” the Treasury Department, Federal Reserve, FDIC and OCC said in a brief joint statement.
The units coordinated this Thursday to share efforts in relation to their size. JP Morgan Chase, Bank of America, Citigroup and Wells Fargo will each contribute $5 billion. For their part, Morgan Stanley and Goldman Sachs will raise another 2,500 million. The remaining $5,000 million will be shared by other smaller companies: PNC Financial Services, Bank of New York Mellon, Truist Financial, State Street and US Bancorp, each at a rate of $1,000 million.
The private bailout comes as a relief to Treasury Secretary Janet Yellen, who told a Senate commission this Thursday that “the banking system remains sound.” The President of the United States, Joe Biden, has promised that taxpayers will not suffer losses from financial bailouts, as was the case with aid to some companies in the 2008 financial crisis.
First Republic shares plummeted Monday, barely recovering some of the ground lost Tuesday. The punishment intensified this Thursday as the stock hit new lows as agencies S&P and Fitch downgraded their credit ratings amid fears of a deposit flight like the one that caused the liquidity crunch and toppled neighbor SVB in Santa Clara, in the heart of the valley , just outside of San Francisco.
Various formulas were discussed, ranging from a capital increase to buying the company, but the idea that ultimately won out was that each of the big banks should make a multimillion-dollar deposit to stave off the risk of a liquidity crisis.
Although the Federal Reserve approved an advantageous type of loan to provide liquidity to struggling companies and prevent deposit flight, the type of assets held by First Republic did not allow access to an adequate cushion.
First Republic Bank has partnered with JP Morgan to try to weather its crisis. On Sunday, the same day that regulators seized Signature Bank, the San Francisco-based bank said it has “continued to improve and diversify its financial position” by borrowing additional liquidity from the Federal Reserve and JP Morgan secured. “Total cash available and not used to fund operations already exceeds $70,000 million,” he said in a statement at the time.
First Republic specializes in private banking and has grown into a wealth management firm with approximately $271 billion in assets. In recent days, the bank has been trying to differentiate itself from Silicon Valley Bank. Unlike the latter, which counted startups and venture capital firms among its largest clients, First Republic has said that no sector accounts for more than 9% of total business deposits. However, its location, size, strong growth, and high volume of uninsured deposits are parallels that investors have considered.
As in the case of Silicon Valley Bank, First Republic executives sold nearly $12 million worth of stock in the months leading up to the bank’s stock market crash. Their president, James Herbert, has gotten rid of about $4.5 million worth of titles, according to TWSJ. It’s actually a fairly small fraction of his stake, and Herbert took turns buying and selling, according to forms the bank posted on its website.
Moody’s has worsened the solvency outlook for the US financial sector overall, putting half a dozen companies, including First Republic Bank, on watch for a possible downgrade.
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