Wall Street giants to the rescue of First Republic
< p class="sc-v64krj-0 dlqbmr">The US financial authorities have welcomed the action of the eleven banks.
Eleven major US banks chose Thursday to come together to the rescue of the struggling First Republic and prevent it from becoming the next domino to fall after three bankruptcies in a row .
They have pledged a total of US$30 billion in deposits to First Republic. This is a sign, according to them, of their confidence in the country's banking system, said a joint statement.
This action was welcomed by US authorities, the Ministry of the Economy, the US Federal Reserve and two financial regulators who believe in a separate statement that it demonstrates the resilience of the banking system.
< p class="e-p">The day had started badly for First Republic. After already losing 73% in a week, the stock lost as much as 36% after a Bloomberg report that the bank was exploring strategic options for its future, including a possible sale.
However, the stock rallied as rumors surfaced of a possible joint intervention by the big banks. It finished up 12%.
First Republic, the 14th-largest US bank by asset size, found itself in trouble after the short-term failures of Silicon Valley Bank [SVB], Signature Bank and Silvergate, as it primarily serves a wealthy clientele.
The bankruptcy at Silicon Valley Bank is the result of panic among depositors, who withdrew billions of dollars due to fears surrounding the bank's finances .
Investors and analysts feared that many customers would prefer to move their money to establishments that presented no a priori risk of bankruptcy, because they were too big for regulators to let them close, and that First Republic in turn would have to be liquidated.
A grim prospect for confidence in the banking system as a whole.
The big banks have therefore decided to act in concert.< /p>
The banking system has strong credit, abundant liquidity, large capital and high profitability. Recent events have not changed this situation, they say in their joint statement.
Bank of America, Citigroup, JPMorgan Chase and Wells Fargo, the nation's four largest banks by asset size, are expected to contribute US$5 billion each.
Merchant banks Goldman Sachs and Morgan Stanley are to pay $2.5 billion each, while BNY Mellon, PNC Bank, State Street, Truist and U.S. Bank are to pay $1 billion.
Founded in 1985 and headquartered in San Francisco, First Republic provides personal and corporate private banking and wealth management services. It has offices mainly in California, but also on the east coast (New York, Massachusetts, Connecticut, Florida) and in the states of Oregon, Washington and Wyoming.
It has an affluent clientele, concentrated in coastal urban areas, described in a note Eric Compton, an analyst at Morningstar. And it has grown rapidly in recent years, growing from US$22 billion in assets at the end of 2010 to US$212 billion at the end of 2022.
But the profile of its customer base has recently been a weakness, after the closures of banks that had bet on particular sectors of activity, namely the world of high technology for SVB and that of cryptocurrencies for Signature Bank and Silvergate.
According to S&P Global Ratings, 68% of deposits at First Republic are in accounts over US$250,000, the limit usually guaranteed by the authorities. Enough to encourage their holders to want to protect their money by moving it.
Already closely watched for a few days, the bank had indicated on Sunday that it had strengthened and diversified its liquidity and had 70 billion US dollars thanks to credit facilities offered by the US Federal Reserve and JPMorgan Chase.
Insufficient in the eyes of the rating agencies S&P Global Ratings and Fitch, which had lowered on Wednesday the rating they give to the company's debt in the category of speculative investments.
By acting in concert, the major American banks want to illustrate their confidence in First Republic and in banks of all sizes, and demonstrate their general commitment to helping banks serve their customers and communities, reads their press release.