Wall Street chief executives are occasionally willing to come together to support a good cause. The gathering organised by Treasury secretary Janet Yellen and Federal Reserve boss Jay Powell on Thursday was not quite a traditional charity event, however.
The US’s biggest banks, including JPMorgan Chase, Citigroup, Well Fargo, Bank of America and several others stumped up $30bn to deposit in First Republic Bank, which has assets totalling more than $200bn. The California-based bank, which caters to an elite clientele, had been teetering since the collapse of Silicon Valley Bank a week ago.
The deposit gambit is clever. But it follows a pattern. Last Sunday the Fed and JPMorgan said they would provide liquidity in the form of a credit line to the tune of $70bn. According to First Republic on Thursday, its borrowing from the Fed had totalled between $20bn and $109bn this week.
No matter. Its stock price still fell 6o per cent this week on worries of a fatal deposit exodus. The infusion from the all-star cast is intended to drum up confidence among existing First Republic clients and shareholders to halt their panic.
The move is also notable for what it is not. As depositors, the consortium is now effectively creditors of First Republic, having given them cash that represents a claim at the bank.
No member of the group was willing or was allowed to buy First Republic outright, assuming both its assets and liabilities. Such a comprehensive transaction seems impossible with the stock price in freefall and the balance sheet unsettled.
Nor did the banks purchase an equity stake in First Republic. The cash would have been useful, but its immediate problem is liquidity, not an equity capital shortfall.
First Republic and other regional banks on the brink must simply survive as standalone entities, neither subsumed by reticent rivals nor absorbed by regulatory authorities who would be forced to manage a fire sale. A diverse and robust set of financial institutions is a social good. The enlargement of the biggest banks is not.
Credit lines and deposits remain half measures. But Wall Street’s self-interested charitable move looks like a smart way of forestalling panic that might otherwise damage them too. Fingers crossed that skittish bank customers do not interpret that as a sign of Wall Street’s own nervousness.
Lex: a sum of the pars exercise
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