A consortium of the largest banks in the United States has offered a $30 billion lifeline to First Republic Bank, which is facing a crisis of investor and consumer confidence. The Treasury Department issued a statement on Thursday, welcoming the support and emphasizing the resilience of the banking system. The major institutions involved in the lifeline are JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, and Truist.
The infusion of funds is expected to provide much-needed relief to the struggling San Francisco lender, allowing it to meet customer withdrawals and restore confidence in the US banking system during a turbulent time for lenders. A spokesperson for First Republic declined to comment. In a joint statement, the banks involved expressed their confidence in First Republic and in banks of all sizes, noting that regional, midsize, and small banks are all essential to the health and functionality of the financial system.
Markets volatile over liquidity issues
On Thursday, the shares of First Republic Bank experienced multiple suspensions due to volatility but ended the day up by over 10%. The bank's problems have highlighted ongoing concerns about the banking system in the wake of the failures of Silicon Valley Bank and Signature Bank. On Wednesday, both Fitch Ratings and S&P Global Ratings downgraded the credit rating of First Republic Bank due to worries that depositors may withdraw their funds.
Like numerous regional banks, First Republic holds significant amounts of uninsured deposits beyond the FDIC's $250,000 maximum. According to S&P Global, while First Republic's percentage of uninsured deposits is lower than SVB's (94%), 68% of its total deposits are uninsured. As a result, many customers have left the bank, forcing First Republic to borrow money or sell assets to pay out their cash deposits.
To generate revenue, banks typically lend a portion of consumer deposits to other customers. However, S&P Global reports that First Republic's liability-to-deposit ratio is an unusually high 111%, indicating that the bank has made more loans than it has consumer deposits, making it a particularly risky investment.
Yellen organizes a private meeting
Two sources familiar with the matter have revealed that Treasury Secretary Janet Yellen held a private meeting with JPMorgan CEO Jamie Dimon on Thursday in Washington before 11 banks agreed to deposit $30 billion in First Republic Bank to stabilize the faltering lender. This meeting followed a series of conversations between Yellen and other US officials, as well as executives from some of the country's largest banks, over the previous two days, as they sought a private sector lifeline for the struggling California bank.
While Yellen led the government's effort, Dimon organized the bank executives who ultimately supported the dramatic infusion of deposits. According to another source with knowledge of the situation, Yellen first proposed the idea of the largest US banks collaborating to direct deposits to First Republic, which was viewed as crucial to stabilizing the bank's deposit base and signaling the bank's importance to the US financial system.
Despite the Federal Reserve's creation of a loan system to prevent the failure of regional banks after the failure of SVB, it appears that this federal intervention was insufficient to satisfy investors. First Republic announced a deal with JPMorgan on Sunday to access cash quickly if necessary, and JPMorgan stated that it had $70 billion in unused assets that it could use to pay customer withdrawals quickly if necessary.