Wall Street Times

First Republic Bank receives financial assistance of $30 billion

Image Commercially Licensed from: Unsplash
Image Commercially Licensed from: Unsplash

First Republic BankThe banking industry is in crisis, as many institutions face dwindling customer and investor trust.

Silicon Valley Bank and Signature both failed late last week, and Credit Suisse is also in difficulty in Europe.

This week, First Republic Bank is dealing with shaky investor and customer confidence.

Yet, unlike other institutions, there is still hope for the bank, since it is scheduled to get a lifeline from some of America’s most major banks.

The news

As First Republic Bank is in trouble, multiple American central banks are throwing it a $30 billion lifeline.

Among the banks that are aiding are:

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

On Thursday, the Treasury Department made the following statement:

“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 liquidity needed by the faltering San Francisco bank to meet client withdrawals.

It also benefits the American banking system, which is dealing with a severe lender problem.

The following statement was released by the banks:

“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

Due to volatility, First Republic Bank’s shares were halted three times on Thursday.

Yet, it completed the day with more than 10%.

After the collapses of Silicon Valley and Signature Bank, the bank’s problems highlighted continued worries about the banking system.

On Wednesday, concerns were expressed concerning depositors’ ability to withdraw their monies.

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

First Republic Bank is one of the regional banks with a high proportion of uninsured deposits in excess of the FDIC’s $250,000 limit.

While it does not compare to Silicon Valley Bank’s massive 94% uninsured deposits, S&P Global says that First Republic has a considerable 68% uninsured deposits.

Yet, many customers opted to leave the bank and deposit their money elsewhere, causing a problem for First Republic Bank.

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

Banks make money by lending out portions of their customers’ deposits to other customers.

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

The ratio suggests that the bank lent more money than it had in customer deposits, implying that it is a risky venture for investors.

Read also: Credit Suisse take on loans after shares dropped by 30%

Private meeting

According to two people familiar with the situation, Treasury Secretary Janet Yellen met privately with JP Morgan CEO Jamie Dimon on Thursday.

They met before deciding to invest $30 billion in First Republic Bank to keep it afloat.

The conference concluded two days of discussions with Yellen and other US officials, as well as the leaders of the country’s largest banks.

The two parties collaborated to find a solution to the bank’s concerns.

The government initiative was led by Janet Yellen, while Dimon pushed bank CEOs to support the flood of deposits.

Yellen, according to a source, advocated assembling the biggest US banks to make direct deposits for First Republic Bank.

The measure was critical in maintaining the bank’s deposit base.

That was also a significant indicator to the financial market concerning the bank and the US financial system.

Loan system

After Silicon Valley Bank’s failure, the Federal Reserve devised a lending structure to prevent regional banks from collapsing.

The program allows banks to offer Treasury bonds to the Fed as collateral for one-year loans.

The Fed would then pay banks for the value of the Treasuries, which plummeted in value when interest rates were hiked last year.

The federal support seemed insufficient to satisfy investors.

First Republic Bank announced a cooperation with JPMorgan on Sunday to provide quick access to liquidity if needed.

In addition, the bank indicated that it had $70 billion in idle assets that it will use to fund customer withdrawals if necessary.