First Republic getting $30-billion infusion from U.S. banking giants to avert crisis

The United States’ largest financial institutions have agreed to deposit US$30-billion in First Republic Bank, an unconventional private-sector rescue designed to shore up confidence in the financial system and contain an emerging crisis.

The agreement was brokered by the U.S. government, but is funded by 11 of the country’s largest lenders and investment banks. Bank of America, Citigroup, JP Morgan Chase and Wells Fargo, known as the Big Four U.S. banks, are leading the effort with US$5-billion each.

San Francisco-based First Republic is caught in the fallout from Silicon Valley Bank’s collapse last Friday. Its shares have plummeted as much as 70 per cent over the past week. Much like SVB, First Republic has not reported any sudden loan losses or writedowns. But clients nervous about its stability have been pulling deposits and transferring them to larger institutions, something known as a flight to quality.

With First Republic looking like the next domino to fall in a cascade of bank failures, the larger lenders and investment banks are hoping their deposits will keep it standing, and prevent the situation from spiralling out of control.

It is an unusual approach. The banks appear keen on testing mechanisms that aren’t as extreme as full-blown takeovers.

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Such takeovers were necessary during the 2008 global financial crisis, and they included the buyouts of investment banks such as Bear Stearns and Merrill Lynch at cut-rate prices. While they helped to stabilize the system, the deals proved to be headaches for their buyers for years after.

Thursday’s private-sector rescue follows central bank intervention on both sides of the Atlantic. The U.S. government has already insured all deposits at SVB and Silvergate Bank, which also failed last week. And the U.S. Federal Reserve has provided fresh liquidity for banks that need to swap bonds for cash at full value. Early Thursday in Switzerland, the Swiss National Bank offered up to 50 billion Swiss francs in liquidity to support the ailing Credit Suisse.

The interventions helped to calm investors Thursday, with major Western stock markets climbing higher. But the situation is very volatile, and banks are likely to keep getting tested. In the U.S., deposits may keep flowing to larger institutions, and it is unclear if the banks involved in First Republic’s rescue package will step up to support a second lender, or a third, should that be required.

In Europe, Credit Suisse, Switzerland’s second-largest bank, has been troubled for years. While it embarked on a restructuring before the latest drama, current financial market conditions will make it harder for it to emerge from the revamp in better shape.

Credit Suisse and First Republic must find ways to shore up investor confidence in a rapidly changing operating environment. Central banks are hiking interest rates – the European Central Bank raised its own by another 50 basis points Thursday – and higher rates change lenders’ operating calculus.

Until very recently, banks had been able to pay depositors next to nothing, then lend the deposits out at much higher rates. This spread, known as the net interest margin, is likely to shrink, especially at troubled lenders. In its funding announcement Thursday, First Republic disclosed that over the past week it had borrowed tens of billions of dollars from the Federal Reserve and the Federal Home Loan Bank at rates ranging from 4.75 per cent to 5.09 per cent.

First Republic currently pays 0.01 per cent in interest annually on its business chequing accounts. The Fed funding is much more expensive. The bank did not disclose what interest rate it will pay on the US$30-billion worth of deposits from rivals.

New data released from the Fed late Thursday showed a major jump in borrowing from the central bank over the past five days, as multiple lenders struggled with fleeing deposits and an uncertain market. The amount borrowed from the Fed through its regular line of credit jumped US$148-billion, to US$153-billion, in one week, and lenders also borrowed $US12-billion under the Fed’s newly created Bank Term Funding Program, which was set up on Sunday.

First Republic’s shares gained 10 per cent Thursday, clawing back some of their losses from the previous week, but then sank over 20 per cent in after-hours trading once details of the private sector rescue package were announced. Despite getting US$30-billion in deposits, First Republic also announced it will suspend its dividend, and it revealed plans to reduce its debt burden. Details on the latter are still to come.

Credit Suisse announced a similar measure early Thursday, saying it has plans to buy back US$2.5-billion worth of U.S.-dollar-denominated debt and another €500-million worth of euro-denominated debt.

The 11 financial institutions contributing uninsured deposits to First Republic include Goldman Sachs Group Inc. and Morgan Stanley, which pitched in US$2.5-billion each. PNC Financial Services Group Inc., Bank of New York Mellon Corp., Truist Financial Corp., U.S. Bancorp and State Street Corp. will each add in US$1-billion.

The banks said their contributions demonstrate their confidence in the U.S. banking system.

“The banking system has strong credit, plenty of liquidity, strong capital and strong profitability. Recent events did nothing to change this,” the group said in a joint statement. “Together, we are deploying our financial strength and liquidity into the larger system, where it is needed the most.”

In a joint statement by the U.S. Department of the Treasury, Federal Reserve Board Chair, Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, the agencies said the industry collaboration demonstrates the financial system’s stability.

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