Shares in First Republic and several other US regional banks plunged on Monday as investors worried that regulators had not done enough to stem deposit outflows following the collapse of Silicon Valley Bank.
First Republic was down by two-thirds in early afternoon trading in New York, having fallen as much as 75 per cent in the morning, while trading in its shares and those of several other US lenders were halted multiple times due to volatility.
Investors dumped the bank stocks even after the Federal Reserve and Treasury boosted lenders’ access to quick cash following the government takeovers of Silicon Valley Bank and Signature Bank.
Arizona-headquartered Western Alliance Bank was down about 60 per cent while shares of Los Angeles-based PacWest and Utah’s Zions both dropped by roughly a quarter. Of the 124 listed US banks with a market value of $5bn or less as of Friday, more than 100 were in the red.
The sell-off continued despite a pledge from President Joe Biden to do “whatever is needed” to protect bank deposits as he sought to reassure Americans their money was safe.
“We will not stop at this,” he added, referencing the US government’s actions at the weekend. “We’ll do whatever is needed on top of all [this].”
Some analysts said the sell-off was overdone given that the investor fears relate to bank liquidity, which the Fed is addressing, rather than solvency.
“There’s no question over the value of balance sheets here as there was in 2008, but I don’t know at this point what it takes to get people to look at the situation more carefully,” said Jesse Rosenthal, head of US financials at CreditSights.
SVB was taken over by the government on Friday following a run on its deposits and a collapse in its stock price amid fears it was struggling for capital. On Sunday, regulators took over Signature Bank, which had close ties to the crypto sector.
Monday’s sell-off was driven in part by fears that other regional banks could see a run by depositors similar to the one that brought down SVB, especially by clients with balances above the $250,000 covered by federal insurance.
“The reality is that all kinds of market participants are nervous,” said Mayra Rodriguez Valladares, a regulatory consultant. “Everyone is wondering, ‘What if I have assets at Bank A or B or C?’”
As stress rippled through the financial system, a lender to many US regional banks raced to raise tens of billions of dollars in a move to safeguard the sector.
The Federal Home Loan Banks system was finalising the sale of $88.7bn of short-term notes on Monday afternoon, signalling banks could tap the backstop for funding in the coming days, according to two people briefed on the transaction.
The sheer size of the offering would give the system, created in the midst of the Depression, the ability to lend a mammoth sum to banks attempting to fortify their balance sheets as they struggle with deposit flight.
The FHLB — seen as the lender of second-last resort before a bank might tap emergency funding from the Fed — was already a large provider of capital to Silicon Valley Bank. The Federal Home Loan Bank of San Francisco had advanced $15bn to SVB, as well as a further $14bn to First Republic at the end of last year, a filing with US securities regulators showed.
The FHLB could not be reached for comment.
First Republic on Sunday shored up its finances with funding from the Fed and JPMorgan Chase as fears of contagion spread among regional lenders. The bank said the funding gave it $70bn of unused liquidity, excluding money available from the new Bank Term Funding Program announced on Sunday.
However, the steep decline in its share price has put pressure on First Republic, which has $213bn in assets and caters to wealthy individuals.
After news of SVB’s collapse broke on Friday, the chief financial officer of one technology start-up in San Francisco told the Financial Times that he went directly to First Republic to withdraw his company’s funds.
The government was closely monitoring the situation at First Republic and was ready to intervene if the San Francisco-based financial institution came under stress in the event of a run on it, said a person with direct knowledge of the matter.
If required, the Federal Deposit Insurance Corporation would be prepared to take over the bank, wiping out shareholders and bondholders to protect depositors as it did with SVB and Signature, said a person with first-hand knowledge of the plan being developed by US officials.
First Republic was believed to be in a better position than SVB and Signature as of late Sunday, which was why it was not taken over 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 were hoping that the actions taken to protect depositors at SVB and Signature would reassure account holders at First Republic.
There were no “white knights” lining up with bids for First Republic so far, according to people with knowledge of the matter.