In an extraordinary effort to stave off financial contagion and reassure the world that the American financial system was stable, 11 of the largest U.S. banks came together on Thursday to inject $30 billion into First Republic Bank, a smaller peer on the brink of collapse after the implosion of Silicon Valley Bank last week.
Hatched on Tuesday during a call between Treasury Secretary Janet L. Yellen and Jamie Dimon, the chief executive of JPMorgan Chase, the plan has each bank depositing at least $1 billion into First Republic. It is meant as a show of support for First Republic and a signal to the market that the San Francisco lender’s woes do not reflect deeper trouble at the bank.
Ms. Yellen believed that such a move by the private sector would underscore confidence in the health of banks. Mr. Dimon, whose bank saved several rivals during the 2008 financial crisis, was on board.
In 48 hours, the deal was done.
The arrangement was without precedent in decades, and an indication of how dire the banking sector’s predicament had become within a week. With its echoes of the 2008 financial crisis, the collapses of Silicon Valley Bank on Friday and Signature Bank on Sunday sparked a panic that appears unlikely to subside immediately.
The four banks that put the most money into the effort — JPMorgan Chase, Bank of America, Wells Fargo and Citigroup — said in a joint statement that the action “demonstrates their overall commitment to helping banks serve their customers and communities.”
The four banks will each deposit $5 billion. Goldman Sachs and Morgan Stanley are putting in $2.5 billion each. PNC Financial, Truist, BNY Mellon, State Street and U.S. Bank are each depositing $1 billion.
Biggest U.S. banks by total assets
State Street Bank and Trust
Morgan Stanley Private Bank
State Street Bank and Trust
Morgan Stanley Private Bank
Shares of First Republic, which had lost three-quarters of their value in recent days, rallied on the announcement, which was made during market hours. But numerous other bank stocks, mainly those of small and regional banks, continued to be pummeled. The banking sector has also been under pressure from Credit Suisse, which was fighting for its life before Switzerland’s central bank stepped in to provide a backstop early Thursday.
Before Thursday’s announcement, First Republic had hired advisers to explore options to save the bank, including a possible sale to a larger rival or a rescue that could include a quick injection of cash to ensure that it had enough to pay out customer withdrawals.
The lender had also tried to shore up its finances last weekend with up to $70 billion in emergency loans from the Federal Reserve and JPMorgan.
As recently as Monday, James H. Herbert II, the chairman of First Republic, told CNBC that the bank was not seeing an unusual number of depositors flee. On Thursday, however, the bank admitted in a news release that it had been suffering daily deposit outflows. It didn’t specify a figure or a time frame, and said the pace was “slowing considerably.”
Mr. Herbert and the chief executive, Mike Roffler, signed a statement calling the rescue from the larger banks “a vote of confidence for First Republic and the entire U.S. banking system.”
Founded in 1985, First Republic was owned by Merrill Lynch for a brief period in 2007 but was spun off after another firm absorbed Merrill during the 2008 financial crisis. The bank offers money management services to wealthy clients and is a big player in mortgages. Its customer deposits totaled $176 billion in January, up from $90 billion just three years ago.
The bank’s troubles started roughly a week ago when Silicon Valley Bank teetered. First Republic attracted particular scrutiny from worried investors because of its high number of wealthy clients, whose deposits were not insured by the Federal Deposit Insurance Corporation in the event of a bank failure. The F.D.I.C. insures customer deposits up to $250,000.
The bank’s large book of real estate loans was also a concern. Many analysts suggested that First Republic didn’t have enough assets that it could liquidate easily to cover deposit withdrawals should there be a run on the bank. As major ratings agencies downgraded the bank’s credit, there were fears that it, too, would topple.
On Tuesday, Ms. Yellen brought up the idea of involving the private sector during a call with Jerome H. Powell, the Fed chair; Martin Gruenberg, the chair of the F.D.I.C.; and Michael Barr, the Fed’s vice chair for supervision, a person familiar with discussions said.
Shortly afterward, Ms. Yellen proposed the idea to Mr. Dimon. Although he had been bruised by JPMorgan’s fraught takeover of Washington Mutual when it collapsed during the 2008 financial crisis, he agreed, according to people with knowledge of the discussions.
The nation’s largest bank, JPMorgan had already been working with First Republic, extending it a line of credit earlier in the week, so it had more at stake than some competitors. Mr. Dimon began wrangling bank executives in private calls, while Ms. Yellen called other business leaders and regulators, some of the people said.
Some top executives at other banks initially resisted the plan. Some of them asked why they should bail out First Republic when they hadn’t done so for Silicon Valley Bank and Signature Bank. Others thought that the F.D.I.C. should take over the struggling bank, or didn’t agree that there was an acute risk to the financial system.
Things remained in flux through Wednesday. By that night, the banks, advised by the law firm Davis Polk, had agreed to commit up to $24 billion. But Mr. Dimon kept working the phones, calling small banks to see if they would pitch in, the people with knowledge of the discussions said.
When First Republic’s stock plunged 36 percent after the market opened on Thursday, the holdouts quickly agreed to participate. That brought the commitments up to $30 billion.
The hope was that the new funding would stem a run on First Republic, and ensure that any depositors who wanted to withdraw money could do so seamlessly. There’s also the chance of a small profit: First Republic will pay the banks interest at market rates.
On Thursday morning, Ms. Yellen — before she was scheduled to testify before the Senate Finance Committee — convened a call with regulators and bank chief executives. Once the hearing ended, Mr. Dimon met Ms. Yellen in her office to finish the deal ahead of the banks’ joint statement.
Since the announcement, banks that were not part of the group of 11 have asked if they can join, a person with knowledge of the deal said. There’s a perception that being in the group “identifies you as one of the strong banks,” the person said.
Stacy Cowley and Jeanna Smialek contributed reporting.