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| photo: japantimes.com |
First Republic Bank, which is currently experiencing a loss of trust from both investors and customers, is going to receive a financial rescue package worth $30 billion from a consortium of the biggest banks in the United States.
In response to this news, the Treasury Department issued a statement on Thursday, expressing its appreciation for the group of large banks and stating that this support demonstrates the strength of the banking system.
The consortium of major banks providing the financial aid to First Republic Bank includes JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, and Truist.
The $30 billion financial injection will provide the struggling San Francisco-based bank with the much-needed funds to meet customer withdrawals and restore faith in the American banking system during a period of turmoil for lenders.
A spokesperson for First Republic declined to comment on this matter.
The group of banks involved in the financial aid package issued a statement, expressing their confidence in First Republic and banks of all sizes. They emphasized the importance of regional, midsize, and small banks in maintaining the health and operation of the financial system.
Markets volatile over liquidity woes
The markets are experiencing instability due to concerns about liquidity. First Republic Bank's shares were halted multiple times on Thursday due to volatility but ended the day with a gain of over 10%.
The issues faced by First Republic Bank highlight the ongoing worries about the banking system, following the collapse of Silicon Valley Bank and Signature Bank. On Wednesday, both Fitch Ratings and S&P Global Ratings downgraded First Republic Bank's credit rating due to concerns that depositors might withdraw their funds.
Many regional banks, including First Republic, hold large amounts of uninsured deposits that exceed the $250,000 limit set by the FDIC. While not as high as Silicon Valley Bank's 94% of uninsured deposits, First Republic has a significant 68% of total deposits that are uninsured, according to S&P Global.
This has led many customers to withdraw their funds and put them elsewhere, creating a problem for First Republic. The bank must borrow money or sell assets to pay customers their deposits in cash.
To generate profits, banks use a portion of customers' deposits to provide loans to other customers. However, S&P Global states that First Republic has an unusually high liability-to-deposit ratio of 111%. This means that the bank has lent out more money than it has in deposits, making it a particularly risky investment for shareholders.
Yellen organizes a quiet meeting
Two people familiar with the matter reported that Treasury Secretary Janet Yellen arranged a discreet meeting with JPMorgan CEO Jamie Dimon in Washington on Thursday, just before 11 banks agreed to deposit $30 billion in First Republic Bank to stabilize the struggling lender.
This meeting was the culmination of a series of discussions over the past two days between Yellen, other US officials, and leaders from some of the largest banks in the country, as they sought a private sector solution to help the troubled California bank.
Yellen spearheaded the government's efforts, while Dimon took the lead in organizing the bank executives who would eventually support the significant infusion of deposits.
According to another source familiar with the matter, it was Yellen who first came up with the idea of the largest US banks collaborating to direct deposits toward First Republic. This move was considered crucial to stabilize the bank's deposit base and to send a signal to the financial markets about both the bank and the US financial system.
Following the collapse of Silicon Valley Bank, the Federal Reserve established a loan system aimed at preventing regional banks from failing. Under this program, banks can offer their Treasury bonds to the Fed as collateral for one-year loans. In exchange, the Fed provides the banks with the value they paid for the Treasuries, which have decreased in value over the past year due to the Fed's interest rate hikes.
However, this unprecedented federal intervention seems to have been insufficient to satisfy investors.
To address the issue, First Republic announced on Sunday that it had struck a deal with JPMorgan to access cash quickly if necessary. The bank also stated that it had $70 billion in unused assets that it could use immediately to fulfill customer withdrawals if required.
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