The latest multi-billion dollar effort to help a bank comes from the banking industry itself.
A group of 11 banks deposited $30 billion in First Republic, the California lender that many investors, analysts and depositors saw as faltering following the collapse of its similarly sized neighbor Silicon Valley Bank.
The banks plan was announcement by Treasury Secretary Janet Yellen, Federal Deposit Insurance Corporation Chairman Martin Gruenberg, and Acting Comptroller of the Currency Michael J. Hsu — and separately by the banks themselves. It was a coordinated show of force after the announcement late Sunday that all depositors at Silicon Valley banks would be reinstated and the banking system would have access to special funding from the Federal Reserve.
While less dramatic than any kind of direct federal support — there’s no presidential press conference scheduled to discuss the deposits — the banks’ move shows the banking system is still fragile after the Silicon Valley Bank collapse. and the efforts of the Federal Reserve, FDIC and Treasury. to contain the fallout. The move was aimed at further strengthening the mid-sized banking sector, which has seen a decline in deposits in favor of larger banks, often perceived as safer for banks. depositors.
It is also a sign that First Republic’s efforts to distinguish itself from Silicon Valley Bank have not been successful. While the $30 billion in deposits is a sign that the banks had faith in the survival of the First Republic, it also shows that potential outflows of deposits – caused by fears that the bank’s largely wealthy depositor base would see their money disappear if the bank were to fail — are always a concern for the industry.
The Federal Reserve also announced that banks had borrowed more than $160 billion from central bank emergency loan programs, indicating that the need for funding goes beyond a few obviously struggling banks.
reverse flow
While the deposits do not guarantee the continued health of the First Republic, they do show that the banking industry – including the megabanks – is concerned about the flow of deposits from mid-sized and smaller banks to larger ones, which could expose these medium-sized banks to the risk of bankruptcy.
The fact that the First Republic needed the deposits shows the limits of the FDIC and Treasury guarantee of depositors at Silicon Valley Bank and Signature Bank. While many have interpreted the deposit guarantee as implicitly supporting deposits across the banking system, Thursday’s massive injection to counter deposit outflows shows that many bank depositors are still worried, even for the big banks of midsized.
The nation’s largest banks participated in the effort, including JPMorgan Chase, Bank of America, Citigroup and Wells Fargo, who deposited $5 billion each.
Banks presented mass deposit as as part of an effort to thwart and possibly even prevent further withdrawals of deposits at “a small number of banks”. Overall, the banks said, “The banking system has strong credit, plenty of liquidity, strong capital and strong profitability. Recent events have not changed that. …Together, we are deploying our financial strength and liquidity into the larger system, where it is most needed.”
The attempts of the First Republic to stand out
At the end of last year, First Republic had approximately $212 billion in assets, making it the 14th-largest bank in the country, just north of Silicon Valley Bank, the 16th-largest bank before its collapse. If the First Republic had failed, it would have been the second largest bank failure in American history, supplanting the Silicon Valley Bank.
Shares of the First Republic closed up 10% today, perhaps indicating that the acute danger of its collapse has passed. As concerns mounted over the failure of Silicon Valley Bank, First Republic has spent much of the past week trying to differentiate itself, despite some considerable similarities.
In its latest financial report, the bank said it had $176 billion in deposits, including nearly $120 billion uninsured by the Federal Deposit Insurance Corporation. This fact alone was enough to set a target on the bank’s back, as it was comparable to Silicon Valley Bank’s uninsured deposit ratio. The bank also said in its annual report that more than 90% of its funding comes from deposits, which means that if the bank were to fail, its overall losses would not need to be so high to affect its uninsured depositors. .
In recent days, First Republic has tried to emphasize how different it is from Silicon Valley Bank, pointing out that only 9% of its deposits come from a single sector, unlike SVB’s reliance on technology and science from the life. What First Republic was trying to demonstrate was that it was not exposed to the risk of a rush to group chats where a group of highly connected investors and executives all decided to try to withdraw all their money at the same time.
Similar risks and more delicate politics
But industry analysts weren’t so sure the distinctions First Republic was trying to make mattered more than the similarities. In a note explaining why he said First Republic debt was riskier, Fitch rating agency said First Republic’s deposit base was still “focused” and that due to the bank’s “strategic focus on wealthy, financially sophisticated customers in certain urban coastal markets in the United States,” there was both a high percentage of uninsured deposits and that those deposits. travel at the same time to withdraw their money. the money if they were afraid of not getting it back.
While Silicon Valley Bank has provided high levels of customer service and personal banking services to founders and technology investors as part of its overall strategy to serve technology companies, First Republic “has a unique business model, with a high range of services aimed at wealthy clients concentrated in coastal regions. urban areas,” Morningstar analyst Eric Compton wrote in a February research report. The bank also specialized in home loans to these wealthy coastal elites, including a mortgage for Mark Zuckerberg.
The bank’s focus on high-end customers could have made any explicit government support politically tricky. The bailout of Silicon Valley Bank depositors is already controversial, even though the company had many businesses and even nonprofits that relied on it for payroll. The First Republic depositors may have been less sympathetic.
But like Silicon Valley Bank, First Republic was also reporting substantial losses on its bond portfolio, though not as severely as Silicon Valley Bank before its collapse. “If it were to face higher than expected deposit outflows and liquidity guarantees prove insufficient, the bank may need to sell assets, crystallizing unrealized losses,” the bank said. Rating agency Moody’s said on Monday.
Since the collapse of Silicon Valley Bank, First Republic has tried to reassure its clients’ shareholders, saying in a Press release Friday that its “deposit base is strong and very well diversified,” its “liquidity position remains very strong” (i.e. it could handle deposit withdrawals) and that it was well capitalized. Mondayhe sought to reassure customers, depositors and investors again, announcing that he had “diversified his financial position with access to additional liquidity from the Federal Reserve Bank and JPMorgan Chase”.
This was an attempt to show that the central bank and the largest bank in the country still considered it a safe enough bank to lend. The bank also made use of a special loan facility set up by the Federal Reserve. Shares fell sharply again on Monday and rose again on Tuesday before falling back on Wednesday. From the close of trading last Thursday to Wednesday, the bank’s share price had fallen by two-thirds.
Like its “midsize” peers, First Republic will likely face greater scrutiny following the Silicon Valley bank’s collapse, which could further squeeze earnings, Compton wrote in a note earlier in the week.
Thanks to Brett Zach for writing this article.