On Thursday, a group of 11 banks, including Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo, came together to support First Republic Bank with a $30 billion deposit injection.
The move was an attempt to prevent the bank from failing and bringing others down with it, as it was seen as vulnerable following the collapse of Silicon Valley Bank (SVB) the previous week.
Both banks had a high-net-worth clientele, with about three-quarters of First Republic’s mortgage approvals being “jumbo” loans above $417,000, and many clients having a median net worth of $3.3 million.
First Republic’s clientele also included businesses like the Lincoln Center and the San Francisco Ballet.
However, like SVB, it was caught out when interest rates began to rise, and its wealthy clientele found they had more appealing offers for where to park their cash.
The bank was also considered to be at risk due to its high level of uninsured deposits.
The higher the percentage of clients with uninsured deposits, the more likely a bank is to see its customers panic and try to withdraw all their money, which may not be possible.
SVB had a dangerously high percentage of uninsured deposits, with 94 percent of its total, and First Republic had 68 percent.
After the weekend, First Republic’s shares nosedived 67 percent, and panicked customers raced to branches to empty their accounts of their huge savings.
On Tuesday, the CEO of JPMorgan Chase, Jamie Dimon, held a conversation with Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen to discuss their concerns about First Republic.
On Wednesday, Dimon attended a Bank Policy Institute event and spoke to other banking executives about a possible plan to shore up First Republic.
The next day, the deal was done, and the agreement sent Wall Street higher.
First Republic’s shares closed up nearly 10 percent, but they had lost two-thirds of their value in the past seven days and were down more than 65 percent month-to-date.
Thursday’s agreement is hoped to put a lid on the wild week, but concern is now switching to Credit Suisse, which has been propped up by the Swiss Central Bank and threatens far more wide-reaching consequences if it teeters.
The Federal Reserve has launched an investigation into the mismanagement of SVB, and its findings could also cause more consternation.
»11 Banks Band Together to Save First Republic Bank from Collapse«