U.S. banks on bumpy path as First Republic’s troubles persist
Just weeks ago, they were bit players in the giant U.S. banking system. Now, a handful of regional lenders are at the heart of a crisis that’s shaken the country and engaged the likes of Warren Buffett and Jamie Dimon.
At the last tally in the rapidly evolving turmoil, one of the two collapsed lenders remained for sale while the fate of a third bank looked increasingly bleak.
Billionaire investor Buffett was in touch with the Biden administration about potentially providing aid, while smaller banks and lawmakers demanded that the government offer more protection for customer deposits.
The continued upheaval — despite regulators’ efforts to contain it — came amid another wrenching moment in banking: UBS Group AG agreed buy Credit Suisse Group AG after a crisis of confidence at the stricken lender. While that deal ends a week of intense speculation over the Swiss bank’s fate, the prospects for America’s regional banks remain uncertain.
Shares in First Republic Bank fell 47% at Monday to close at $12.18, following last week’s record 72% retreat.
The lender was downgraded by S&P Global Ratings for a second time on Sunday after being cut to junk just days ago, even after the bank received $30 billion from 11 U.S. banks to stave off a potential collapse.
“This is going to be pretty bumpy going forward,” Mohamed ElErian, chief economic adviser at Allianz SE and a Bloomberg Opinion columnist, said in an interview with Bloomberg Television. “People are doing something that probably is not rational but is totally understandable — they’re moving deposits. That dynamic isn’t going to stop over night, neither are the losses that are being incurred.”
Depositors have been fleeing regional lenders following the collapse of SVB Financial Group’s Silicon Valley Bank, after it failed to raise capital amid huge losses on its debt investments. In one day alone, depositors attempted to pull $42 billion. The bank collapsed into receivership the next day and the Federal Deposit Insurance Corp. sought a sale.
On Sunday, Bloomberg News reported the FDIC was moving toward a breakup solution for the lender after a second auction failed to line up a buyer. Bids are now due Friday for the bridge bank — a sign the fast resolution regulators were pushing for isn’t imminent.
The pain quickly had spread to other regional banks, prompting their shares to tumble. Moody’s Investors Service placed six regional banks on review for downgrade and cut the outlook for the entire U.S. banking system to negative from stable, citing the runs on deposits.
The deal — the brainchild of U.S. Treasury Secretary Janet Yellen and backed by JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon — failed to quell investor concerns about its financial health.
“The biggest open question is First Republic, which suffered a run after being somewhat unfairly linked to Silicon Valley Bank and Signature Bank,” said Todd Baker, a senior fellow at Columbia University’s Richard Paul Richman Center for Business, Law and Public Policy. “I am expecting a private capital infusion or an M&A deal soon there so that the bank can hold onto primary banking relationships with its core base of wealth individuals and their businesses.”
The future of one troubled regional bank was resolved late Sunday: The FDIC announced that a subsidiary of New York Community Bancorp agreed to acquire key elements of New York-based Signature Bank, which was closed by state financial regulators a week ago and placed in FDIC receivership.
New York Community Bancorp’s Flagstar Bank will acquire “substantially all deposits and certain loan portfolios” from Signature, the FDIC said. Signature’s 40 branches will operate as Flagstar locations as of Monday.
Taking a page from the last financial crisis, the FDIC negotiated to get equity appreciation rights in New York Community Bancorp common stock that the agency said could ultimately be worth as much as $300 million.
To assuage customers, U.S. regulators unveiled extraordinary measures earlier this month, vowing to fully pay out uninsured deposits in the failed banks.