First Republic bank was on the edge. Now America’s largest banks are depositing $30 billion to try to save it
The latest multibillion effort to aid a bank is coming from the banking industry itself.
A group of 11 banks has deposited $30 billion into First Republic, the California lender that many investors, analysts and depositors saw as teetering on the edge following the collapse of its similarly sized neighbor Silicon Valley Bank.
The banks’ plan was announced
by Treasury Secretary Janet Yellen, Federal Deposit Insurance Corporation Chairman Martin Gruenberg and Acting Comptroller of the Currency Michael J. Hsu — and separately by the banks themselves. It was a coordinated show of force following the Sunday night announcement that all depositors of Silicon Valley Banks would be made whole and that the banking system would have access to special financing from the Federal Reserve.
While less dramatic than any type of direct federal support — there is no presidential press conference scheduled to discuss the deposits — the move by the banks shows that the banking system is still brittle following Silicon Valley Bank’s collapse and the Federal Reserve, FDIC and Treasury’s efforts to contain the fallout. This move was designed to further bolster the mid-size banking sector, which has seen a decline in deposits in favor of the largest banks, which are often perceived as safer for depositors
It’s also a sign that First Republic’s efforts to distinguish itself from Silicon Valley Bank were only so successful. While the $30 billion in deposits is a sign that the banks had faith in the survival of First Republic, it also shows that potential deposit outflows — caused by concerns that the bank’s largely wealthy depositor base could see their money disappear if the bank were to fail — are still a concern for the industry.
The Federal Reserve also announced that banks had borrowed over $160 billion from the central bank’s emergency lending programs, indicating that the need for financing goes beyond a few obviously troubled banks.
Reversing the flow
While the deposits do not guarantee First Republic’s continued health, they do show that the banking industry — including the megabanks — is concerned about the flow of deposits from mid-size and smaller banks into larger ones, which could put those mid-size banks at risk of failure.
That First Republic needed the deposits at all shows the limits of the FDIC and Treasury’s guarantee of Silicon Valley Bank and Signature Bank depositors. While many interpreted the deposit guarantee as implicitly backing the deposits of the entire banking system, the massive infusion Thursday to counter deposit outflows shows that many bank depositors are still worried about even large mid-size banks.
The largest banks in the country participated in the effort, including JPMorgan Chase, Bank of America, Citigroup and Wells Fargo, who deposited $5 billion each
The banks framed the mass deposit as part of an effort to counteract and perhaps even prevent further deposit withdrawals at “a small number of banks.” Overall, the banks said, “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.”
First Republic’s attempts to stand out
At the end of last year, First Republic had around $212 billion of assets, making it the 14th-largest bank in the country — putting it just north of Silicon Valley Bank, the 16th-largest bank before it collapsed. If First Republic had failed, it would have been the second-largest bank failure in American history, supplanting Silicon Valley Bank.
First Republic shares closed up 10 percent Thursday, perhaps indicating that the acute danger of its collapse had passed. As worries mounted following Silicon Valley Bank’s failure, First Republic spent much of the last week trying to differentiate itself, despite some considerable similarities.
In its most recent financial report, the bank said it had $176 billion of deposits, with almost $120 billion not insured by the Federal Deposit Insurance Corporation. This fact alone was enough to put a target on the bank’s back, as it was comparable to Silicon Valley Bank’s ratio of uninsured deposits. The bank also said in its annual report that over 90 percent of its funding comes from deposits, which means if the bank failed, its overall losses would not have to be that high in order to hit its uninsured depositors.
In recent days, First Republic has tried to stress how different it is from Silicon Valley Bank, pointing out that only 9 percent of its deposits come from any one sector, in contrast to SVB’s reliance on technology and life sciences. What First Republic was trying to demonstrate was that it wasn’t at risk of a group-chat-driven bank run where a highly networked group of investors and executives all decided to try to take all their money out at the same time.
Similar risks and trickier politics
But industry analysts weren’t so sure the distinctions First Republic tried to draw were more important than the similarities. In a note explaining why it declared First Republic’s debt to be riskier, the ratings agency Fitch
said that First Republic’s deposit base was still “concentrated” and that because of the bank’s “strategic focus on banking wealthy and financially sophisticated customers in select urban coastal markets in the U.S.,” there was both a high percent of uninsured deposits and that those deposits could be “less sticky in times of crisis or severe stress.” In other words, even if they came from different industries, the bank’s depositors were still wealthy individuals and businesses concentrated on the coasts that could potentially move at the same time to withdraw their money if they were worried they weren’t getting it back.
While Silicon Valley Bank provided high levels of customer service and personal banking to technology founders and investors as part of its overall strategy to serve technology businesses, First Republic “has a uniquely focused business model, with a high service offering aimed at wealthy clients concentrated in coastal urban areas,” Morningstar analyst Eric Compton wrote in a February research report. The bank also specialized in real estate lending to those wealthy costal elites, including a mortgage for Mark Zuckerberg
The bank’s focus on high-end customers could have made any explicit government support politically tricky. The rescue of Silicon Valley Bank depositors is already controversial, even as the company had many corporate and even nonprofit customers who relied on it for payroll. First Republic’s depositors may have been less sympathetic.
But like Silicon Valley Bank, First Republic was also reporting substantial losses on its portfolio of bonds, although not as severely as Silicon Valley Bank before its collapse. “If it were to face higher-than-anticipated deposit outflows and liquidity backstops proved insufficient, the bank could need to sell assets, thus crystalizing unrealized losses,” the rating agency Moody’s said Monday
Since Silicon Valley Bank’s collapse, First Republic has tried to reassure shareholders in clients, saying in a press release
on Friday that its “deposit base is strong and very-well diversified,” its “liquidity position remains very strong” (i.e., it could handle deposit withdrawals) and that it was well capitalized. On Monday
, it sought to reassure clients, depositors and investors again, announcing that it had “diversified its financial position through access to additional liquidity from the Federal Reserve Bank and JPMorgan Chase.”
This was an attempt to show that the central bank and the nation’s largest bank still saw it as a bank safe enough to lend to. The bank also made use of a special lending facility set up by the Federal Reserve. The shares still went down violently on Monday and rose again on Tuesday before falling again on Wednesday. From the close of trading last Thursday through Wednesday, the bank’s share prices had fallen by two-thirds.
Like its “mid-size” peers, First Republic will likely have to undergo more scrutiny in the wake of the collapse of Silicon Valley bank, which could further dent profits, Compton wrote in a note earlier his week.
A group of 11 banks has deposited $30 billion into First Republic.