First Republic’s share price jumps nearly 50 per cent after Yellen indicates more protection for depositors
First Republic Bank’s future looked increasingly secure on Tuesday as the possibility of further government support sparked a dramatic share price revival.
Speaking to the American Bankers Association, Treasury Secretary Janet Yellen indicated that the Federal Deposit Insurance Corporation (FDIC) could step in to guarantee all deposits, as it did with Silicon Valley Bank (SVB), if First Republic experienced further problems.
“Our intervention was necessary to protect the broader US banking system. And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion,” Yellen said.
First Republic has faced an exodus of deposits over the last few days sparked by the collapse of SVB as it has a relatively high proportion of uninsured deposits and faces large unrealised losses on its portfolio of low-yielding mortgage backed securities.
Yellen’s speech will likely calm jumpy depositors who fear they might lose everything if they keep their cash at First Republic. Its share price rallied nearly 50 per cent in the early afternoon.
Other regional lenders also received a boost from Yellen’s intervention. Western Alliance Bancop and PacWest Bancorp were both up 16 per cent. The KBW Nasdaq Regional Banking Index climbed 4.4 per cent.
The news came after reports that Wall Street CEOs were considering further options to shore up First Republic.
Last week a consortium of Wall Street banks led by JP Morgan deposited $30bn into the California-based lender. Despite this, First Republic’s share price continued falling and its debt was downgraded by ratings agencies twice in the same week.
According to reports today, one of the options under discussion was converting some of the $30bn of deposits into equity.
Reuters reported that if its fundraising plans failed, First Republic might sell parts of its business in a bid to raise cash and cut costs. A sale of loans to other parties is one option under consideration.