US banks pooled $30 billion to support First Republic Bank and to limit the impact of recent collapses of two major lending institutions.
First Republic, a California lender, will receive $5 billion deposits from JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo, while Goldman Sachs and Morgan Stanley will deposit $2.5 billion each. BNY Mellon, PNC Bank, State Street, Truist, and US Bank will deposit $1 billion each.
On Thursday (16 March), America's largest banks expressed confidence in the country's banking system and announced their commitment to deploying financial strength and liquidity where it is needed most.
Uncertainty remains on whether the step taken will reestablish trust in First Republic and the overall banking industry. Despite Thursday's recovery, First Republic's stocks have fallen over 20 per cent in post-market trading.
The bank's stock decreased following the announcement of dividend suspension and plans to reduce borrowings along with the size and structure of its operations during a period of uncertainty.
Ackman tweeted that the effort to support First Republic was a "fictional" show of confidence and blamed it for spreading default risk to major banks.
US banks sought help from the Federal Reserve after the collapse of SVB. The Fed provided support, lending $160 billion in the week ending 15 March through its discount window and emergency facility, indicating wider problems in the banking industry.
On Thursday (16 March), data from the Fed indicated that there was a record high usage of the discount window, reaching $152.85 billion in just five days, ending on Wednesday (15 March). This surge was due to the emergency measures announced on Sunday (12 March), whereby the terms of the facility were relaxed for banks.
Borrowers took $11.9 billion from the Fed's Bank Term Funding Program and $142.8 billion was given to guarantee deposits at SVB and Signature Bank, according to recent reports.
The government urged banks to assist First Republic, as its debt rating dropped and shares took a hit after the collapse of Silicon Valley Bank, per an involved party.
First Republic's lifeline resembled the 1998 Long-Term Capital Management bailout, with the New York Fed organizing a $3.6 billion rescue package for the hedge fund, including funds from major Wall Street creditors.
US Treasury Secretary Janet Yellen, Federal Reserve Chair Jay Powell, and other regulators welcomed the group of large banks’ support, describing it as a demonstration of the banking system’s resilience.
The Fed is prepared to offer eligible institutions liquidity through the discount window, as usual.
First Republic's shares shot up by over 10 per cent after the announcement, as they had been down by 64 per cent since the Federal Deposit Insurance Corporation took over SVB, causing concerns of the contagion's spread to other regional lenders.
The bank received $70 billion in unused liquidity from the Fed and JPMorgan on Sunday (12 March) to improve its financial position, not counting the funds available through the new federal Bank Term Funding Program.
Moody's put First Republic's long-term ratings on watch for a downgrade due to its dependence on uninsured deposits and suffered losses on held-to-maturity securities. The bank faced a credit rating cut by Fitch and S&P Global on the following day.
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