New York (CNN) Facing a crisis of investor and customer confidence, First Republic Bank will receive a $30 billion lifeline from a group of America’s largest banks.
“This statement of support by a group of major banks is very welcome and demonstrates the resilience of the banking system,” the Treasury Department said in a statement on Thursday.
The major banks are JPMorgan Chase, Bank of America, Wells Fargo, Citigroup and Truist.
The $30 billion infusion will give the struggling San Francisco lender much-needed cash to meet customer withdrawals and bolster confidence in the U.S. banking system during a tumultuous moment for lenders.
A spokesman for the First Republic declined to comment.
In a statement, the banks said their action “reflects their confidence in First Republic and in banks of all sizes,” adding that “regional, medium and small banks are critical to the health and functioning of our financial system.”
Markets volatile due to liquidity problems
Shares of First Republic, which were halted several times Thursday due to volatility, ended the day up more than 10%.
The bank’s troubles underscored ongoing concerns about the banking system in the wake of the collapses of Silicon Valley Bank and Signature Bank.
Both Fitch Ratings and S&P Global Ratings downgraded First Republic Bank’s credit rating on Wednesday over concerns that depositors could withdraw their money.
Many regional banks, including First Republic, have large amounts of uninsured deposits above the $250,000 FDIC limit. While nowhere near SVB’s huge percentage of uninsured deposits (94% of the total), First Republic has a significant 68% of total deposits that are uninsured, according to S&P Global.
That led to many customers leaving the bank and putting their money elsewhere, creating a problem for First Republic: It has to borrow money or sell assets to pay customers their deposits in cash.
To make money, banks use part of customers’ deposits to make loans to other customers. But First Republic has an unusually high liability ratio of 111% to deposits, says S&P Global. That means the bank has been lending more money than customer deposits, making it a particularly risky bet for investors.
Yellen organizes a quiet gathering
Treasury Secretary Janet Yellen met privately in Washington on Thursday with JPMorgan CEO Jamie Dimon before 11 banks agreed to pour $30 billion into First Republic Bank to stabilize the teetering lender, according to two people familiar with the case.
The meeting was the culmination of what had been a series of talks over the past two days between Yellen and other US officials and leaders of some of the country’s largest banks as they sought a private sector lifeline for the battered California bank.
Yellen had run the government, while Dimon was in charge of organizing the bank executives who would ultimately be behind the dramatic infusion of deposits.
Yellen first came up with the idea of having the largest US banks come together to send deposits to First Republic, according to a separate source familiar with the matter. The move was seen as crucial to stabilizing the bank’s deposit base, but also as a crucial signal to financial markets about both the bank and the US financial system.
The Federal Reserve created a lending system designed to prevent regional banks from going out of business after the SVB collapsed. The facility allows banks to give the Fed their government bonds as collateral for one-year loans. In return, the Fed will give the banks the value the banks paid for the government bonds, which have plummeted over the past year as the Fed raised interest rates.
That extraordinary federal intervention appears to have been insufficient to keep investors happy.
First Republic announced a deal with JPMorgan on Sunday to provide quick access to cash if needed, and the bank subsequently said it had $70 billion in unused assets it could quickly use to pay customers’ withdrawals if needed.
— CNN’s Phil Mattingly contributed to this report