In an extraordinary effort to stem a financial crisis and reassure the world that the U.S. financial system is stable, 11 of the largest U.S. banks came together on Thursday to pay $30 billion into First Republic Bank. The Silicon Valley bank implosion last week.
On Tuesday, Treasury Secretary Janet L. The plan, developed during a call between Yellen and JPMorgan Chase Chief Executive Jamie Dimon, requires each bank to deposit at least $1 billion in First Republic. It’s a show of support for First Republic and a signal that the San Francisco lender’s woes don’t reflect a deeper problem at the bank.
Ms Yellen hoped such action by the private sector would underline confidence in the banks’ health. During the 2008 financial crisis, the bank saved many rivals. Timon was on board.
Within 48 hours, the deal was done.
The arrangement was unprecedented in decades, and within a week was a sign of how dire the banking sector’s predicament had become. With echoes of the 2008 financial crisis, the collapse of Silicon Valley Bank on Friday and the collapse of Signature Bank on Sunday sparked a panic that is unlikely to subside soon.
The four banks — JPMorgan Chase, Bank of America, Wells Fargo and Citigroup — said in a joint statement that it “demonstrates their overall commitment to helping banks serve their customers and communities.”
The four banks will deposit $5 billion each. Goldman Sachs and Morgan Stanley are investing $2.5 billion each. PNC Financial, Truist, BNY Mellon, State Street and US Bank each deposit $1 billion.
Largest US Banks by Total Assets
State Street Bank and Trust
Morgan Stanley Private Bank
State Street Bank and Trust
Morgan Stanley Private Bank
First Republic shares, which have lost three-quarters of their value in recent days, were buoyed by the announcement during market hours. But many bank stocks, mainly smaller and regional banks, continued to fall. The banking sector has come under pressure from Credit Suisse before Switzerland’s central bank offered to offer a backstop early Thursday.
Before Thursday’s announcement, First Republic hired advisers to explore options to save the bank, including a possible sale to a larger competitor or a quick payment to ensure it has enough money to pay for customer withdrawals.
The lender last weekend sought to raise its funding by up to $70 billion in emergency loans from the Federal Reserve and JP Morgan.
On Monday, James H. Herbert II, President of the First Republic, told CNBC The bank did not see an unusual number of depositors fleeing. However, on Thursday, the bank admitted in a news release that it has been affected by daily deposit outflows. It did not specify a figure or time frame, and said the pace was “slowing down significantly”.
Mr. Herbert and the chief executive, Mike Roeffler, signed a statement calling the bailout from the big banks “a vote of confidence in First Republic and the entire American banking system.”
Founded in 1985, First Republic was briefly owned by Merrill Lynch in 2007 but was spun off after another company absorbed Merrill during the 2008 financial crisis. The bank offers money management services to wealthy clients and is a major player in mortgages. Its customer deposits stood at $176 billion in January, up from $90 billion three years earlier.
The bank’s troubles began a week ago when Silicon Valley Bank collapsed. First Republic drew particular scrutiny from worried investors because the deposits of a large number of its wealthy customers were not insured by the Federal Deposit Insurance Corporation in the event of a bank failure. The FDIC insures customer deposits up to $250,000.
The bank’s large book of real estate loans was also a concern. Many analysts suggested that First Republic did not have enough assets to run a bank that could easily reduce deposit withdrawals. As major rating agencies downgraded the bank’s credit, there were fears that it too could topple.
On Tuesday, Ms. Yellen brought up the idea of involving the private sector during a call with Fed Chair Jerome H. Powell; Martin Grunberg, chairman of the FDIC; And Michael Barr, the Fed’s vice president for oversight, said a person familiar with the discussions.
Shortly thereafter, Ms. Yellen pitched the idea to Mr. Dimon. When Washington Mutual collapsed during the 2008 financial crisis, he agreed, although he was hurt by JPMorgan’s takeover of the company, according to people familiar with the discussions.
JPMorgan, the nation’s largest bank, was already working with First Republic, extending a line of credit earlier in the week, so it was more at risk than some rivals. Mr. Dimon began sparring with bank executives over private calls, while Ms. Yellen called other business leaders and regulators, some said.
Some top officials at other banks initially resisted the plan. Some of them asked why First Republic should be bailed out when Silicon Valley Bank and Signature Bank were not. Others thought the FDIC should take over a struggling bank or simply didn’t agree that there was a serious risk to the financial system.
Until Wednesday, things remained stable. By that night, the banks had agreed to pay up to $24 billion on the advice of law firm Davis Polk. But Mr. Dimon kept working the phones, calling smaller banks to see if they were calling, people familiar with the discussions said.
When First Republic’s shares fell 36 percent after the market opened on Thursday, shareholders quickly agreed to participate. It brought in commitments of up to $30 billion.
The hope is that the new fund will prevent the First Republic from running and any depositors who want to withdraw money will be able to do so without hindrance. There is also the possibility of a small profit: First Republic will pay interest at the market rate to the banks.
On Thursday morning, Mrs. Yellen — before she was scheduled to testify before the Senate Finance Committee — convened a call with regulators and bank chief executives. Upon completion of the investigation, Mr. Dimon met with Ms. Yellen in her office.
Since the announcement, banks not included in the 11-member panel have asked if they could join, a person familiar with the deal said. Being on the board “identifies you as one of the strongest banks,” the person said.
Stacey Cowley And Gina Smialek Contributed report.