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  • Writer's pictureDominic Wilton

The First Republic Deal

Following the collapse of Silicon Valley Bank (SVB) after a bank run on March 10th and the ensuing doubt cast over Credit Suisse causing them to secure $54B in debt from the Swiss National Bank, the spotlight has turned to First Republic Bank.

First Republic Bank (NYSE: FRC) is a midsized US lender and the 14th largest US bank. FRC has recently seen many of its customers rapidly withdrawing their money because of the bank run that affected SVB. The reason this is an issue is that high interest rates drive down the prices of bonds and real estate (FRC’s largest holdings) because of a lower demand for housing and for past issues of bonds that now pay a relatively low interest rate. This price decrease isn’t a problem unless banks face liquidity issues, as is the case of FRC, which had to cover an influx in customer withdrawals caused by the lack of customer confidence in the bank.

This lack of confidence is what spurred the $30B in cash deposits into FRC from the largest US banks (including Morgan Stanley, Goldman Sachs, JPMorgan Chase, etc.) in an attempt to sure up consumer confidence in the US banking system and protect any more banks from collapse.

The $30B deal was orchestrated by U.S. Treasury Secretary Janet Yellen, Federal Reserve Chairman Jerome Powell, and JPMorgan Chase CEO Jamie Dimon.

On top of the $30B in deposits, JPMorgan gave First Republic access to a further $70B in credit, a show of the resilience of the banking system demonstrating confidence that the financial position of FRC is secure. To properly think of the scale of this deal, First Republic held $212B in assets at the end of 2022, and $176B in deposits, meaning the support from large banks is a highly sharp spike in their holdings.

Such a rapid increase in assets should have eased investor concerns a lot more than it did, as FRC closed up 10% on the news only to fall 18% after-hours after suspending their dividend. FRC is now down a total of 81% since March 6th. It is possible that one of the large US banks may offer a buyout. Still, for now, it appears they are trying to win over investor confidence in the banking industry to prevent a mass bank run and another financial crisis.

The situation is still fluid, so it is unclear whether the $30B in deposits will have to be used to cover withdrawals or if it has regained some of FRC’s customers’ confidence. Whatever the situation, with their current deposits and credit from JPMorgan FRC, should be able to avoid collapse.



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