As Treasury Secretary Janet Yellen told lawmakers Thursday the U.S. banking system remains sound, federal officials were moving to help bolster the third U.S. bank in less than a week from collapsing.
San Francisco-based First Republic Bank -- its shares down as much as 80% Thursday from a week ago -- is racing to reassure customers and clients it can avoid the fate of neighboring Silicon Valley Bank, which failed a week ago, and Signature Bank of New York, which toppled Sunday. The two became the second- and third-largest U.S. bank failures.
The U.S. government on Thursday was orchestrating a rescue of First Republic with the nation's biggest lenders. They ultimately agreed to deposit $30 billion with the bank in an effort to stem turmoil that's sent depositors fleeing from regional firms and shaken the country's financial system.
JPMorgan Chase, Bank of America, Citigroup and Wells Fargo will contribute $5 billion of uninsured deposits each, while The Goldman Sachs Group and Morgan Stanley will kick in $2.5 billion apiece, according to a statement late Thursday. Other banks will deposit smaller amounts.
The moves come despite efforts this past weekend by First Republic to shore up its finances with $70 billion in emergency loans and other liquidity from the Federal Reserve and JPMorgan Chase.
It's a stunning turn of events for the lender, which specializes in private banking and has built up a wealth-management franchise with some $271 billion in assets, putting it in rarefied air among American institutions. Yet it's First Republic's emphasis on wealth management that is expected to make its fate different from Silicon Valley Bank.
While it expanded rapidly into capital call lines of credit and lending to venture capitalists -- services in which Silicon Valley Bank specialized -- its specialty serving the affluent is seen as making it more attractive than its California counterpart.
"First Republic Bank grew up in wealth," whereas "SVB started in portfolio companies," said Joe Maxwell, managing partner at Fintop Capital, a fintech venture capital firm. Even though there's a lot of overlap, where they started is still "part of their DNA," he said.
A representative for First Republic didn't immediately reply to a request for comment. Emails sent to the leaders of its newly added adviser team weren't immediately returned.
The bank hasn't said anything publicly about its financial position since Monday, when its chair, James Herbert II, told CNBC in an interview the bank was not seeing an unusual number of depositors flee.
Neither he nor a bank spokesperson have responded to requests to reaffirm that statement or provide a further update.
In a statement Sunday, the bank said, "First Republic's capital and liquidity positions are very strong, and its capital remains well above the regulatory threshold for well-capitalized banks."
First Republic Bank posted a 10% gain to $34.27 by market close Thursday in New York, before dropping more than 20% in late trading after reports of the major banks depositing the $30 billion recovery effort.
The stock has traded as low as $17.53 and as high as $174.21 in the past year.
ON CAPITOL HILL
Testifying earlier Thursday before the Senate Finance Committee, Yellen defended actions of the Biden administration and federal regulators to stabilize the U.S. financial system this week, saying the moves were aimed at preventing problems from spreading through the banking system.
Yellen also sought to reassure the public that America's banks are "sound" and that customer deposits are safe.
The comments were Yellen's first since she and other federal regulators moved to shore up the financial system and contain fallout from the two recent banking failures.
The Fed, the Treasury Department and the Federal Deposit Insurance Corp. announced Sunday they would make sure all depositors at Silicon Valley Bank and Signature Bank were repaid in full.
Yellen played a central role in the rescue effort, ultimately declaring that Silicon Valley Bank posed a "systemic" threat to the economy.
Her determination opened the door to the Fed and the FDIC guaranteeing the uninsured deposits at the failing banks.
On Thursday, Yellen explained that because of the nature of the run on Silicon Valley Bank, she and other regulators feared the unease will spread and cause other banks to face similar outflows of cash.
Despite those actions, Yellen said the United States was not taking a step in the direction of nationalizing the banking system.
Although there have been suggestions that all of the nation's deposits are effectively being insured -- rather than those under $250,000 -- the Treasury secretary made clear that any such guarantees will have to be approved by federal regulators and the Biden administration.
The collapse of the banks and the ensuing market turmoil have led to finger-pointing over whether a 2018 rollback of some of the financial regulations in the Dodd-Frank Act was responsible for the failures.
Yellen called for a reexamination of those bank rules and supervision to "make sure they are appropriate to address the risks that banks face."
However, she suggested that no matter how strong bank capital and liquidity supervision is, a bank can be put in danger of failing if there's an "overwhelming run" spurred by social media.
"Nerves are certainly frayed at this moment," said Sen. Ron Wyden, D-Ore., who chairs the committee. "One of the most important steps the Congress can take now is make sure there are no questions about the full faith and credit of the United States."
Routed the previous day, shares of Credit Suisse Group AG rebounded Thursday after the Swiss central bank agreed to loan the bank up to $54 billion to bolster confidence in the country's second-biggest lender after the American bank failures.
Credit Suisse announced the agreement before the Swiss stock market opened Thursday, sending shares of the company up as much as 33% before settling at a 19% gain to $2.02 in Switzerland.
That's a major turnaround from Wednesday, when news the bank's biggest shareholder will not inject more money into Credit Suisse helped send its shares tumbling some 30% through after-hours trading.
The plunge dragged down other European banks and deepened concerns about the international financial system.
The Swiss National Bank said Wednesday it was prepared to back Credit Suisse because it meets the higher financial requirements imposed on "systemically important banks," adding that problems at some U.S. banks don't "pose a direct risk of contagion" to Switzerland.
Regulators are trying to reassure depositors that their money is safe.
They "don't want anybody to be the person who sits in a darkened room or darkened cinema and shouts fire, because that's what prompts a rush for the exits," said Russ Mould, investment director at the online investment platform AJ Bell.
Credit Suisse, which was beset by problems long before the U.S. bank failures, said the loans from the central bank will give it time to complete a reorganization designed to create a "simpler and more focused bank."
"These measures demonstrate decisive action to strengthen Credit Suisse as we continue our strategic transformation," Chief Executive Ulrich Koerner said in a statement.
Banks are under pressure from interest rate increases by central banks worldwide after a prolonged period of historically low rates.
To boost investment returns, banks needed to take more risks and some "did this more prudently than others," said Sascha Steffen, professor of finance at the Frankfurt School of Finance & Management.
As a result, some banks now face a shortage of "liquidity," meaning they cannot sell assets quickly enough to meet the demands of depositors.
Earlier last week Silvergate Capital, a cryptocurrency-focused bank, announced it would cease operations and liquidate its assets after a bank run forced the California lender to sell a chunk of its debt securities.
Information for this article was contributed by Tom Maloney, Devon Pendleton, Biz Carson, Suzanne Woolley and staff of Bloomberg News (WPNS); by Lauren Hirsch, Rob Copeland and staff of The New York Times; and by Jamey Keaten, Danica Kirka, Fatima Hussein and staff of The Associated Press.