Wall Street chief executives are occasionally willing to come together to support a good cause. Thursday’s gathering hosted by Treasury Secretary Janet Yellen and Federal Reserve boss Jay Powell was not a traditional charity event, however.
The largest US banks, including JPMorgan Chase, Citigroup, Well Fargo, Bank of America and several others, stumped up $30 billion to deposit in First Republic Bank, which has total assets of more than $200 billion. The California-based bank, which caters to elite clients, has been reeling since the collapse of Silicon Valley Bank a week ago.
Deposit gambling is smart. But it follows a pattern. Last Sunday the Fed and JP Morgan said they would provide $70bn of liquidity in the form of credit lines. Its borrowing from the Fed this week was between $20bn and $109bn, according to First Republic on Thursday.
No matter. Its share price is still down 6o percent this week on worries about an exodus of deadly deposits. The motivation of the all-star cast is intended to build confidence among existing First Republic clients and shareholders to prevent their panic.
The move is significant even for those who aren’t. As depositors, the consortium is now effectively First Republic’s creditor, giving them cash that represents a claim on the bank.
No member of the group was willing or allowed to buy First Republic outright, assuming both its assets and liabilities. With the share price in freefall and the balance sheet unsettled, such a broad transaction seems unlikely.
Nor did the banks buy an equity stake in First Republic. Cash would be useful, but its immediate problem is liquidity, not a lack of equity capital.
First Republic and other regional banks on the brink must simply survive as stand-alone entities, neither absorbed by humbler rivals nor absorbed by regulatory authorities who would be forced to conduct fire sales. A diverse and robust set of financial institutions is a social good. The largest banks are not expanding.
Credit lines and deposits remain half-steps. But Wall Street’s self-interested charitable move seems like a smart way to stave off panic that might otherwise hurt them, too. Fingers crossed that sketchy bank clients don’t interpret it as a sign of Wall Street’s own panic.
Lex: A summation of Parse’s exercise
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