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First Republic receives big bank boost as crisis risks loom

  •  
By Charbel Kadib
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4 minute read

US banking giants have deposited over $45 billion in funds with First Republic amid fears of a fourth bank collapse. 

San Francisco-based private bank and wealth management firm First Republic has confirmed its receipt of uninsured deposits totalling US$30 billion (AU$45 billion) with an initial term of 120 days at market rates. 

The funding boost, received on Thursday (16 March), has come from a host of major banking institutions — Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, Goldman Sachs, Morgan Stanley, Bank of New York Mellon, PNC Bank, State Street, Truist, and U.S. Bank. 

The deposit fillip is aimed at building confidence in First Republic, which continues to grapple with a sharp decline in consumer and investor sentiment following the collapse of fellow California-based peer, Silicon Valley Bank (SVB). 

First Republic Bank’s founder and executive chairman, Jim Herbert, and its chief executive officer and president, Mike Roffler, released a joint statement welcoming the funding boost. 

“Their collective support strengthens our liquidity position, reflects the ongoing quality of our business, and is a vote of confidence for First Republic and the entire US banking system,” the executives said.

The AU$45 billion deposit influx builds on additional liquidity sourced by First Republic via loan facility drawdowns, actioned following the collapse of SVB. 

Prior to receiving funding support from big bank peers, First Republic reportedly had a cash position of approximately US$34 billion (AU$51 billion).

The bank also reported that from 10-15 March, it borrowed between US$20 billion (AU$30 billion) to US$109 billion (AU$163.5 billion) from the Federal Reserve varied at an overnight rate of 4.75 per cent.

Supporting this was a US$10 billion (AU$15 billion) increase in short-term borrowings from the Federal Home Loan Bank at a rate of 5.09 per cent, actioned since close of business on Thursday, 9 March. 

The board of directors have also suspended common stock dividends, in a bid to reduce dependence on external borrowings. 

These measures follow a week of volatility, with First Republic’s share price plunging 50.4 per cent over the five days of trading ending Thursday, 16 March. 

The bank has also suffered from a marked increase in deposit outflows, which have reportedly “slowed considerably” since the initial shock-induced exodus.

First Republic is among a number of global banks impacted by the recent dip in sentiment following the collapse of SVB, Silvergate Capital, and Signature Bank. 

Switzerland-based investment bank Credit Suisse continues to grapple with an erosion of investor confidence. 

Credit Suisse’s share price recovered on Thursday, increasing 19 per cent following its decision to “pre-emptively” strengthen its liquidity by exercising an option to leverage a Covered Loan Facility and a short-term liquidity facility offered by the Swiss National Bank (SNB).

The “fully collateralised" facilities are valued at approximately AU$81 billion. 

Separately, Credit Suisse has offered to repurchase US$10 denominated senior debt securities via a tender offer, valued at up to US$2.5 billion (AU$3.7 billion), while also launching a cash tender offer for four Euro denominated senior debt securities at an aggregate consideration of up to €500 million (AU$798 million). 

Both offers, which expire on Wednesday, 22 March 2023, would help manage Credit Suisse’s “overall liability composition”, while also “optimising interest expense” and allowing the bank to “take advantage of current trading levels to repurchase debt at attractive prices”.  

Confidence in Credit Suisse was undermined by “significantly higher withdrawals” of cash deposits and non-renewal of maturing time deposits over the fourth quarter of 2022.

These outflows “substantially exceeded” the rates experienced in the previous quarter, up from AU$21 billion to AU$180 billion. 

The recent release of Credit Suisse’s 2022 annual report further dampened sentiment. 

The report detailed the findings of an external review of its internal control mechanisms, aimed at assessing whether the bank has provided “reasonable assurance” regarding the reliability of its financial reporting.

The review found that as at 31 December 2022, the bank’s internal processes were “not effective”, given it did not “design and maintain an effective risk assessment process” used to identify and analyse the risk of “material misstatements”. 

Credit Suisse’s board of directors acknowledged “material weakness”, which may have resulted in misstatements of account balances or disclosures. 

Further, the report noted observations from global consultancy firm PricewaterhouseCoopers, which found Credit Suisse “did not design and maintain an effective risk assessment process”.

However, after acknowledging these gaps, Credit Suisse stressed its financial statements as at 31 December 2022 comply with Swiss law.  

The bank is reportedly developing a remediation plan to address shortcomings.