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Market Daily

First Republic Bank rescued by large banks, $30 billion loaned

First Republic BankThe banking industry has entered a crisis as numerous banks confront diminishing customer and investor trust.

Silicon Valley Bank and Signature collapsed late last week, and Credit Suisse in Europe is also in trouble.

This week, First Republic Bank is grappling with fragile investor and consumer trust.

Unlike other institutions, however, there is still hope for the bank, since it is due to get a lifeline from some of America’s most important banks.

The news

While First Republic Bank faces a credibility crisis, many American central banks are offering it a $30 billion lifeline.

Some of the banks that are assisting include:

  • Bank of America
  • Citigroup
  • JPMorgan Chase
  • Truist
  • Wells Fargo

The Treasury Department issued the following statement on Thursday:

“This show of support by a group of large banks is most welcome, and demonstrates the resilience of the banking system.”

The help

The $30 billion will provide the ailing San Francisco bank with the funds it requires to satisfy consumer withdrawals.

It also helps the US banking sector in the midst of a widespread lender crisis.

The banks issued the following statement:

“This action by America’s largest banks reflects their confidence in First Republic and in banks of all sizes.”

“[And] it demonstrates their overall commitment to helping banks serve their customers and communities.”

“Regional, midsize, and small banks are critical to the health and functioning of our financial system.”

“The banking system has strong credit, plenty of liquidity, strong capital, and strong profitability. Recent events did nothing to change this.”

“Together, we are deploying our financial strength and liquidity into the larger system, where it is needed the most,” they continued.

“America’s larger banks stand united with all banks to support our economy and all of those around us.”

Liquidity problems

First Republic Bank’s shares were stopped three times on Thursday due to volatility.

Yet, it ended the day at more than 10%.

The bank’s issues highlighted the ongoing concerns about the banking industry following the failures of Silicon Valley and Signature Bank.

Concerns were raised on Wednesday about depositors’ capacity to withdraw their funds.

As a result, First Republic Bank’s credit rating was reduced by Fitch Ratings and S&P Global Ratings.

First Republic Bank is one of the regional banks having a large number of uninsured deposits in excess of the $250,000 FDIC limit.

While it does not compare to Silicon Valley Bank’s large 94% uninsured deposits, S&P Global reports that First Republic has a sizable 68% of total deposits that are uninsured.

Nonetheless, many clients chose to quit the bank and deposit their funds elsewhere, posing a challenge for First Republic Bank.

As a result, the bank has two options: borrow money or sell assets in order to pay consumers in cash for their deposits.

Banks generate money by lending parts of their customers’ deposits to other customers.

Even so, First Republic Bank has an extraordinary liability-to-deposit ratio of 111%, according to S&P Global.

The ratio implies that the bank lent more money than it had in client deposits, indicating that it is a hazardous investment for investors.

Read also: Credit Suisse takes up Swiss National Bank’s loan offer after 30% shares crash

Private meeting

Treasury Secretary Janet Yellen met privately with JP Morgan CEO Jamie Dimon on Thursday, according to two persons familiar with the matter.

They met before agreeing to put $30 billion in First Republic Bank to keep it solvent.

The meeting was the culmination of two days of meetings between Yellen and other US authorities as well as heads of the country’s top banks.

The two sides worked together to find a solution for the bank’s problems.

Janet Yellen led the government effort, while Dimon urged bank CEOs to support the influx of deposits.

According to a source, Yellen proposed gathering together the top US banks to make direct deposits for First Republic Bank.

The action was crucial in terms of preserving the bank’s deposit base.

That was also an important signal to the financial market about the bank and the American financial system.

Loan system

Following the fall of Silicon Valley Bank, the Federal Reserve established a lending system to avoid regional banks from failing.

The program permits banks to provide the Fed with Treasury bonds as security for one-year loans.

The Fed would then reimburse banks for the value of the Treasuries, which fell in value when the Fed raised interest rates last year.

The federal assistance looks insufficient to keep investors happy.

On Sunday, First Republic Bank unveiled a partnership with JPMorgan to fast access liquidity if needed.

Furthermore, the bank stated that it has $70 billion in idle assets that it will utilize to cover consumer withdrawals if necessary.

Image source: CNBC

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