New York (CNN) First Republic Bank, facing a crisis of investor and customer confidence, will receive a $30 billion lifeline from America’s largest banks.
“This show of support from a group of major banks is very welcome and demonstrates the resilience of the banking system,” the Treasury said in a statement on Thursday.
The largest banks are JPMorgan Chase, Bank of America, Wells Fargo, Citigroup and Truist.
A $30 billion infusion will give the troubled San Francisco lender much-needed cash for customer withdrawals and bolster confidence in the U.S. banking system at a turbulent time for lenders.
A spokeswoman for the First Republic declined to comment.
The banks said in a statement that their actions “reflect their confidence in First Republic and banks of all sizes,” adding that “regional, mid-sized and small banks are critical to the health and functioning of our financial system.”
The market is unstable due to liquidity problems
Shares of First Republic, which were halted several times due to volatility on Thursday, ended the day up more than 10%.
The bank’s problems underscored ongoing concerns about the banking system after the collapse of Silicon Valley Bank and Signature Bank.
Both Fitch Ratings and S&P Global Ratings downgraded First Republic Bank on Wednesday amid concerns that depositors could withdraw cash.
Many regional banks, including First Republic, have large amounts of uninsured deposits that exceed the $250,000 FDIC limit. While First Republic doesn’t come close to SVB’s high percentage of uninsured deposits (94% of its total), it has a significant 68% of all deposits that are uninsured, according to S&P Global.
That prompted many customers to leave the bank and put their money elsewhere, creating a problem for First Republic: It has to borrow money or sell assets to pay off customer deposits with cash.
In order to make money, banks use part of their customers’ deposits to grant loans to other customers. But First Republic has an unusually high debt-to-deposit ratio of 111 percent, S&P Global says. This means that the bank has lent more money than it has customer deposits, making it a particularly risky bet for investors.
Yellen holds a silent meeting
Treasury Secretary Janet Yellen met privately with JPMorgan CEO Jamie Dimon in Washington on Thursday before 11 banks agreed to deposit $30 billion into First Republic Bank to stabilize the troubled lender, according to two people familiar with the matter.
The meeting was the culmination of talks over the past two days between Yellen and other U.S. officials and some of the nation’s biggest bank leaders as they seek a private-sector lifeline for the battered California bank.
Yellen had been driving the effort on the part of the government, while Dimon led the effort to organize the bank executives who would eventually be behind the dramatic increase in deposits.
Yellen was the first to get the idea that the largest US banks would come together to direct deposits to First Republic, says a separate source familiar with the matter. The move was seen as critical to stabilizing the bank’s deposit base, but it was also a critical signal to financial markets about both the bank and the US financial system.
The Federal Reserve created a loan system designed to prevent regional banks from failing after the collapse of SVB. The arrangement allows banks to give the Fed their government bonds as collateral for one-year loans. In return, the Fed gives the banks the value the banks paid for Treasuries, which have collapsed over the past year as the Fed has raised interest rates.
This extraordinary federal intervention seems insufficient to keep investors happy.
On Sunday, First Republic announced a deal with JPMorgan to quickly access cash when needed, and the bank then said it has $70 billion in idle assets it could use quickly to pay customer withdrawals when needed.
— CNN’s Phil Mattingly contributed to this report