The Wall Street giants took action on Thursday to end the mounting US banking crisis by agreeing to buy troubled First Republic, a medium-sized bank whose stocks have been ravaged amid wider banking turmoil, to support.
Bank of America, Goldman Sachs, JP Morgan and others will pour $30 billion into First Republic, which has seen customers pull their money after the collapse of Silicon Valley Bank (SVB) and fears First Republic could be next.
“The actions of America’s largest banks reflect their confidence in the nation’s banking system. Together, we are putting our financial strength and liquidity into the larger system, where it is most needed,” the banks said in a joint statement on Thursday.
The big banks have received billions in deposits from smaller, regional banks as the banking crisis has terrified their customers. US authorities moved in last weekend to take over New York’s SVB and Signature bank after frightened customers withdrew their deposits.
Banks and regulators hope the move will act as a firewall, protecting First Republic and stopping the spread of the crisis to other smaller banks.
Shares of First Republic — a San Francisco-based bank largely catering to wealthier clients, including Facebook co-founder Mark Zuckerberg — had fallen about 70% since news of the SVB’s collapse. They fell another 22% on Thursday before the bailout, but ended the day up nearly 10%.
In a joint statement, U.S. Treasury Secretary Janet Yellen, Federal Reserve Chair Jay Powell and senior regulators said, “This show of support from a group of major banks is very welcome and demonstrates the resilience of the banking system.”
Ahead of the news, Yellen assured Congress Thursday that the US banking system was “sound”.
“I can reassure the members of the committee that our banking system is sound and that Americans can be confident that their deposits will be there when they need them,” she told the Senate Finance Committee.
SVB had a high percentage of “uninsured” deposits – deposits above the $250,000 government-insured limit. The SVB’s uninsured deposits accounted for 94% of the total. First Republic’s uninsured deposit rate was much lower — 68% according to S&P Global — but was high enough to worry investors and savers with more than $250,000 in accounts at the bank.
The unprecedented bailout will cause most of the largest US banks to make uninsured deposits in First Republic. Bank of America, Citigroup, JP Morgan Chase and Wells Fargo each contribute $5 billion to First Republic. Goldman Sachs and Morgan Stanley each contribute $2.5 billion, and BNY Mellon, PNC Bank, State Street, Truit and US Bank each contribute $1 billion, for a total deposit from the eleven banks of $30 billion.
The news came as the Swiss central bank extended a $53.7 billion loan to Credit Suisse to stop its own crisis of confidence. The long-plagued bank’s share price had collapsed after its largest shareholder, Saudi National Bank, said it was unable to provide more funding to Credit Suisse.