First Republic Bank stock fell more than 30 percent on Wednesday.
(Photo: Reuters)
new York The big US institutions support the ailing First Republic Bank. Eleven banks will park a total of $30 billion in fresh deposits at the San Francisco regional bank. This unusual support measure was coordinated by the US Treasury Department, the Federal Reserve, the deposit insurance FDIC and the banking regulator OCC, as the authorities announced on Thursday.
Banks supporting First Republic include America’s largest bank JP Morgan Chase, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley. The US government apparently wanted to prevent another bank failure after the end of the Silicon Valley Bank (SVB) and the New York Signature Bank. “This support from a group of major banks is most welcome and shows the resilience of the banking system,” it said in a statement.
The First Republic Bank share price initially lost up to 36 percent on Thursday. The reason was reports that the bank was considering various options to strengthen its own finances – including a sale. Investors were very nervous.
“Typically, a headline about a potential sale would support the stock,” concluded Christopher McGratty, an analyst at Keefe, Bruyette and Wodds. “But the potential bank outflows following the collapse of Silicon Valley Bank (SVB) put First Republic in a difficult position.”
The bailout appeared to reassure investors. In later trading, the paper turned positive and closed eleven percent up. The share has had a violent roller coaster ride in the past few days and has lost a good half of its value since Friday.
First Republic is based in San Francisco, but also has offices in other states such as New York. The bank is primarily focused on the wealthy clientele. But even with her, concerns had recently arisen that the deposits were not adequately secured.
Rating agencies had downgraded creditworthiness
Rating agencies S&P and Fitch downgraded their rating of First Republic Bank’s creditworthiness to junk status on Wednesday. The stock plummeted more than 20 percent that day.
The WSJ, citing a document, reports that First Republic executives have sold millions of dollars worth of stock in the bank over the past two months. This was not noticed before. Unlike most companies, First Republic insider trades are not required to be reported to the SEC.
At First Republic, the Fed and JP Morgan provided more liquidity over the weekend to avoid panic among customers. Nevertheless, the share collapsed massively on Monday and only recovered slightly on Tuesday.
“First Republic’s options have diminished following the outflow of deposits, the fall in the share price and the recent downgrades by rating agencies,” writes Herman Chan, an analyst at Bloomberg Intelligence. A possible sale could focus on the attractive wealth management business, he says.
Deposits at Silicon Valley Bank and Signature Bank in New York were also not adequately secured. This had led to customers massively withdrawing their deposits. The two banks were rescued over the weekend.
Investments in long-term investments
Silicon Valley had primarily invested in long-term bonds. However, this was problematic because these are currently worth less due to the rise in interest rates. When many customers withdrew their funds, the bank had to realize these losses, triggering renewed panic.
Now the focus is on the US regional banks because they have not been so heavily regulated since the Trump administration. They can invest their customers’ deposits without protecting them as much as big banks like Citi or JP Morgan require.
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