First Republic and other US regional banks plunge over fears of deposit flight

Shares in First Republic and several other U.S. regional banks tumbled on Monday as investors feared regulators hadn’t done enough to curb deposit outflows following the collapse of Silicon Valley Bank.

First Republic was down two-thirds early in the afternoon in New York after falling as much as 75 percent in the morning, while trading in its shares and those of several other US lenders halted multiple times due to volatility.

Investors dumped bank stocks even after the Federal Reserve and Treasury Department improved lenders’ access to quick cash following the government’s takeovers of Silicon Valley Bank and Signature Bank.

Arizona-based Western Alliance Bank lost about 60 percent, while shares in Los Angeles-based PacWest and Utah-based Zions both fell about a quarter. Of the 124 publicly traded US banks with a market value of $5 billion or less as of Friday, more than 100 were down.

The sell-off continued despite President Joe Biden’s pledge to do “whatever it takes” to protect bank deposits as he tried to reassure Americans their money was safe.

“We will not stop there,” he added, referring to the US government’s actions over the weekend. “We will also do whatever is necessary [this].”

Some analysts said the sell-off was overdone as investor concerns relate to bank liquidity rather than solvency.

“The value of the balance sheets is unquestionable here, as it was in 2008, but I don’t know at this point what it would take to get people to take a closer look,” said Jesse Rosenthal, chief of US treasury at CreditSights.

SVB was taken over by the government on Friday after a rush on its deposits and a slump in its share price amid fears it would struggle for capital. On Sunday, regulators took over Signature Bank, which has been closely associated with the crypto sector.

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Monday’s sell-off was fueled in part by fears that other regional banks could experience a similar run of depositors as that which brought down the SVB, particularly from customers with balances over $250,000 who are covered by federal insurance.

“The reality is that all types of market participants are nervous,” said Mayra Rodriguez Valladares, a regulatory advisor. “Everyone asks, ‘What if I have assets at bank A or B or C?'”

As stress gripped the financial system, a lender to many US regional banks rushed to raise tens of billions of dollars to protect the sector.

The Federal Home Loan Banks system suspended the sale of $88.7 billion in short-term debt securities Monday afternoon.

The sheer size of the supply would give the system created in the middle of the depression the ability to lend a mammoth amount to banks trying to strengthen their balance sheets while struggling with deposit flight.

The FHLB — seen as the second-of-last-resort lender before a bank could seek emergency funding from the Fed — was already a big financier to Silicon Valley Bank. The Federal Home Loan Bank of San Francisco donated $15 billion to SVB late last year and another $14 billion to First Republic, according to a filing with US securities regulators.

The FHLB could not be reached for comment.

First Republic bolstered its finances with funds from the Fed and JPMorgan Chase on Sunday as fears of contagion spread among regional lenders. The bank said the funding brought it $70 billion in unused liquidity, excluding funds available from the new Bank Term Funding Program announced Sunday.

However, the sharp fall in its stock price has pressured First Republic, which has $213 billion in assets and caters to wealthy individuals.

After news of SVB’s collapse broke on Friday, the chief financial officer of a San Francisco tech start-up told the Financial Times he went straight to First Republic to withdraw his company’s funds.

The government is closely monitoring the situation at First Republic and stands ready to intervene if the San Francisco-based financial institution came under pressure in the event of a run, said a person with direct knowledge of the matter.

If necessary, the Federal Deposit Insurance Corporation would be willing to take over the bank and wipe out shareholders and bondholders to protect depositors, as it did with SVB and Signature, a person testifying to the plan developed by US officials said knows firsthand.

First Republic was believed to be better positioned than SVB and Signature as of late Sunday, which is why it was not adopted and included in the backstop plan for the two failed banks, said the person with direct knowledge of the matter.

Biden and Treasury Secretary Janet Yellen hoped depositor protection measures at SVB and Signature would reassure First Republic account holders.

According to people familiar with the matter, there have been no “white knights” lining up with offers for the First Republic.

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