Big banks rush to save the First Republic
Just as the banking world seemed poised to return to some kind of normality, its fate was once again in jeopardy with news of a potential First Republic Bank failure.
Like many others during this rollercoaster week, the regional bank faced contagion fears from the fall of Silicon Valley Bank (SVB).
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SVB went bankrupt last week after learning the bank was selling a large portion of securities and shares at a loss to cover a cash shortfall. Its deposit base, made up of mostly VC-backed startups, had many deposits exceeding the FDIC-insured limit of $250,000.
News that it might be in trouble spooked customers into a bank run to protect their money, interrupted only by the bank’s closure and an FDIC pledge to fully protect deposits.
Wayward depositors, now aware of the precarious nature of their deposits relative to the amount insured by the FDIC, scrutinized First Republic for its similarities to SVB.
The First Republic also had a wealthy depositor base, a similar size, and more than two-thirds of deposits were uninsured.
Over the weekend, the bank announced that it had secured $70 billion in additional funding via JP Morgan and other funds made available by the Federal Reserve Banks Term Funding Program, set up following the fall of SVB. However, this did little to stem the flow of deposits out of the bank.
On Wednesday, March 15, ratings agencies Fitch and S&P downgraded First Republic, reflecting low confidence in the bank and citing liquidity and funding risks. Stocks continued to fall.
On the brink of yet another failure, the industry reacted. The executives had would have been meeting earlier in the week to discuss possible options.
Thursday, March 17, 11 major banks rushed to the rescue.
A $30 billion cash injection was orchestrated to save the failing bank. JPMorgan, Citigroup, Bank of America and Wells Fargo are each making an uninsured deposit of $5 billion. Morgan Stanley and Goldman Sachs with $2.5 billion each and five others with $1 billion each. Deposits cannot leave the bank for 120 days, and the hope is that this will tide the institution over during the current period of fear and uncertainty.
“This show of support from a group of major banks is welcome and demonstrates the resilience of the banking system,” the Treasury Department said in a statement.
Either way, success is always in the air.
The announcement appeared to reinforce the bank’s share price drop on Thursday night, but Friday’s open sent it down another 20%.
The similarities with SVB continue.
News that top leaders of the First Republic sold millions of dollars worth of stocks on the eve of the crisis began to surface, echoing reports from SVB.
According The Wall Street Journaldocuments show that insiders at the bank had been selling for months, totaling $11.8 million worth of stock this year.
Unlike other institutions, the sale of the shares did not have to be reported to the SEC and therefore flew under the radar. However, they have been reported to the FDIC individually. First Republic is the only S&P listed company that does not report insider trading to the SEC.
In addition, the leaders of the two banks have reportedly pushed for more flexible regulations towards small banks.
Michael J Roffler, CEO of First Republic, sent a easyr to the Fed and the FDIC, stating its opposition to the proposal to implement similar rules as first-tier banks for small lenders.
“These requirements should only be applied to large interconnected financial institutions whose failure could pose systemic risk to the financial stability of the United States due to capital structure, risk, complexity, financial activities and the size of the banking organization,” he wrote in the letter.
He wrote that he believed the First Republic should be exempted because it “did not pose the same risk to financial stability or present complex resolution issues for which these requirements were designed.” – a statement that turned out to be wrong as recent events have shown.
His efforts to push regulators to loosen legislation on small financial institutions appear to mirror the role Gregory Becker, CEO of the bankrupt SVB, played in raising the asset threshold of Dodd-Frank-imposed legislation.
Raising that threshold is now seen as one of the conditions that allowed the actions that led to SVB’s bankruptcy (and subsequent banking crisis) to continue without consequence for so long.
It was recently reported by Bloomberg that regulators were aware of the problems in SVB’s operations and had contacted the bank several times over the past year.
