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Monday, March 20, 2023

Big US banks create $30 billion bailout for First Republic Bank

The 11 largest U.S. banks on Thursday announced a $30 billion bailout for First Republic Bank to prevent it from going bankrupt. Otherwise, the Californian credit institution would have become the third American bank to fail in less than a week, which would have threatened to worsen the crisis in the banking sector.

First Republic serves the same clientele as Silicon Valley Bank, which went bankrupt on Friday after depositors withdrew about $40 billion from their accounts within hours. The First Republic, which had $176.4 billion in deposits as of December 31, appears to be facing similar challenges.

In a statement, the banking group confirmed that other unnamed banks have experienced large withdrawals of uninsured deposits in individual accounts that exceed the $250,000 level insured by the Federal Deposit Insurance Corporation. First Republic shares fell more than 60% on Monday, even after the bank said it had received additional funding from JPMorgan and the Federal Reserve.

The bailout was reminiscent of the 2008 financial crisis, when big banks collectively came to the rescue of weaker banks at the start of the crisis. Banks then bought weaker credit institutions in an attempt to prevent the crisis from spreading further.

The $30 billion in uninsured deposits is seen as a vote of confidence in the First Republic, whose positions until last week were often the envy of the industry. The bank served wealthy clients, many of whom were billionaires, and offered them generous financial terms. The Wall Street Journal reported that Facebook founder Mark Zuckerberg secured a mortgage through First Republic.

First Republic shares fell 36% early Thursday but rose after reports that a bailout was in the works. The shares closed up 10%.

As part of the JPMorgan Chase bailout, Bank of America, Citigroup and Wells Fargo have agreed to each place $5 billion in uninsured deposits with First Republic. Meanwhile, Morgan Stanley and Goldman Sachs will each deposit $2.5 billion in the bank. The remaining $5 billion comes from $1 billion in contributions from BNY Mellon, State Street, PNC Bank, Truist and US Bank.

“The actions of America’s largest banks reflect their confidence in the nation’s banking system,” the banks said in a statement.

Notably, banks came to the rescue of one of their competitors, while Silicon Valley Bank failed because its closest and most loyal customers – venture capitalists and startups – fled the bank at the first sign. of difficulty.

National banking regulators also released a statement praising the bailout.

“This show of support from a group of major banks is welcome and demonstrates the resilience of the banking system,” said Treasury Secretary Janet Yellen, Acting Comptroller Michael Hsu, Federal Reserve Chairman Jerome Powell and FDIC Chairman Martin Grunberg.

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