On Thursday, eleven major banks in the United States revealed a $30 billion bailout plan for First Republic Bank. The objective is to stop the California-based bank from collapsing and becoming the third bank to fail in less than a week. The larger aim is to avoid a widespread banking crisis.
First Republic Bank and Silicon Valley Bank have a similar customer base. Silicon Valley Bank suffered a collapse on Friday after depositors withdrew about $40 billion within a few hours. First Republic Bank, which had $176.4 billion in deposits as of December 31, seemed to be experiencing similar difficulties.
The consortium of banks stated that numerous other banks had experienced substantial withdrawals of uninsured deposits, exceeding the $250,000 amount covered by the Federal Deposit Insurance Corporation. First Republic Bank’s stocks decreased by over 60% on Monday, despite the bank’s announcement that it had acquired extra financing from JPMorgan and the Federal Reserve.
The $30 billion rescue plan triggered memories of the 2008 financial meltdown, when banks supported weaker banks at the outset of the crisis. During that time, banks purchased one another through hasty transactions to prevent the crisis from spreading further.
First Republic Bank’s $30 billion in uninsured deposits is viewed as a sign of trust in the bank, which had a successful banking enterprise before the previous week. The bank focused on serving wealthy clients, including numerous billionaires, and provided them with favorable financial conditions. According to The Wall Street Journal, First Republic Bank offered a mortgage to Mark Zuckerberg, the founder of Facebook.
First Republic Bank’s shares had plummeted by up to 36% in early trading on Thursday. However, they recovered after news emerged of the $30 billion bailout plan. As a result, the bank’s stocks closed with a 10% increase.
The rescue plan involves several major banks, including JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo, each contributing $5 billion in uninsured deposits to First Republic Bank. Additionally, Morgan Stanley and Goldman Sachs have agreed to deposit $2.5 billion each into the bank. The remainder of the $30 billion package is made up of contributions of $1 billion each from BNY Mellon, State Street, PNC Bank, Truist, and US Bank.
“The actions of America’s largest banks reflect their confidence in the country’s banking system,” the banks said.
One noteworthy aspect of the rescue plan is that the banks stepped in to assist a competitor, whereas Silicon Valley Bank failed because its closest and most loyal customers, such as start-ups and venture capitalists, withdrew their funds at the earliest sign of difficulty.
“We are deploying our financial strength and liquidity into the larger system, where it is needed the most,” the banks said.
The banking regulatory authorities of the United States also issued a statement commending the rescue plan.
“This show of support by a group of large banks is most welcome, and demonstrates the resilience of the banking system,” said Treasury Secretary Janet Yellen, Acting Comptroller of the Currency Michael Hsu, Federal Reserve Chair Jerome Powell and FDIC Chairman Martin Gruenberg.
The $30 billion rescue plan for First Republic Bank is viewed as a safeguard against potential bank runs in the future. This week, the shares of numerous mid-sized banks were adversely affected, as investors worried that depositors might withdraw their funds and transfer them to the country’s largest banks.
During the weekend, the federal government took action to safeguard all bank deposits, even those exceeding the $250,000 limit per individual account imposed by the FDIC, in an effort to restore public trust in the banking system. Although the banking crisis began with Silicon Valley Bank, regulatory officials informed the media earlier this week that the government had to intervene to support the banking system since further bank runs appeared likely.