First Republic Bank’s life hangs in the balance, and time is running out. There are heated debates in various parts of the United States to keep the bank afloat until recently. The only question is who is doing what: who is getting involved, other banks or the state? And who pays? Doing nothing is not an option, the banking crisis will not end on its own.
The US government is angry with this bank that is in trouble. To save or not to save a bank is a moral dilemma. Banks should keep their own pants and not be helped with taxpayer money. But the fall of a large bank causes great damage, leading to much financial distress and loss of confidence in the financial system.
So the Biden administration would have preferred the financial sector to solve the problem. Other banks and financial service providers are not opposed, but are weighing their financial risks.
A series of phone calls and meetings are taking place at First Republic Bank’s headquarters in San Francisco and at the headquarters of several major banks, including giant JP Morgan, and with government agencies such as the Department of the Treasury, the Federal Reserve (Fed) in Washington. ) and Bank Balance regulator, FDIC.
Uncertainty despite billions of injections
Founded in 1985, First Republic Bank is a relatively young, private bank and wealth manager operating primarily in Los Angeles, San Francisco and New York City, providing substantial savings and mortgages to wealthy Americans. The bank got in trouble due to problems at another California bank, Silicon Valley Bank, and was weakened by a bank run and a drop in its share price.
A week after the troubles in Silicon Valley, 11 major US banks, including Bank of America, Citigroup and JPMorgan Chase, bailed out First Republic and injected $30 billion into the bank’s vault in hopes of stabilizing the company. They feared that if the First Republic collapsed, other banks would be in trouble because of their common interests and connections.
Meanwhile, customers largely withdrew their $102 billion in savings in March, according to First Republic. First Republic’s share price fell 95 percent to $6.19 last Thursday, from $122.50 on March 1.
The bank’s market capitalization has now dropped from $22 billion in early March to just $1.15 billion. It’s a drama not only for shareholders, but also for the bank itself, as equity is shrinking at almost the same rate, exacerbating financial problems.
The purchase of First Republic costs a lot of money. First Republic’s equity shrank and the bank’s assets tumbled. So tens of billions of dollars have to be added to keep the bank afloat.
So banks would ideally want the regulator to provide financial backing by guaranteeing savings, as they did when bailing out Silicon Valley Bank, which was eventually acquired by First Citizens Bank.
Talks about a rescue have been going on for several weeks and have intensified over the past few days. It looks like the idea will pop up next weekend. Financial markets are then closed and therefore not disruptive.
dele
The evacuation and scrapping of a until recently sound and well-functioning bank is a bad sign for financial stability. It seems that no matter how big and healthy a bank is, banks can’t compete with sudden suspicions, a bank run, and fleeing investors.
What’s particularly bothering the First Republic is rising interest rates. The bank has many, often large mortgages and loans in its portfolio at very low interest rates. Due to higher interest rates, the collateral for these loans, often bonds, are now less valuable and therefore count less for financial buffers.
Add to that more than $100 billion in lost savings and a falling share price. As a result, the First Republic forces them to raise additional capital, but borrowing money is costly and the question is who else is willing to lend to a troubled bank.
Source: NOS
Roy Brown is a renowned economist and author at The Nation View. He has a deep understanding of the global economy and its intricacies. He writes about a wide range of economic topics, including monetary policy, fiscal policy, international trade, and labor markets.
