JPMorgan Chase, Bank of America, Citigroup and Wells Fargo step in to rescue First Republic Bank.
The largest US banks have put up $30 billion in deposits as a rescue package for the embattled First Republic Bank. (FRC) – Get a free report.
So what does that mean for the banking crisis that has multiplied over the past week? “That’s the end of the crisis,” veteran banking analyst Dick Bove, chief financial strategist at Odeon Capital Group, told TheStreet.com.
DON’T MISS: First Republic shares jump on banks’ plan to coordinate $30bn deposit bailout
JPMorgan Chase, Bank of America, Citigroup and Wells Fargo will contribute $5 billion in uninsured deposits each, while Goldman Sachs and Morgan Stanley will deposit $2.5 billion each. Other banks will provide smaller amounts.
The package reminds Bove of past financial crises when the leaders of the biggest banks joined forces to quell problems. “The biggest was the panic of 1907,” when JP Morgan’s intervention helped put an end to the turmoil, Bove said.
JPMorgan Chase, Bank of America, Citigroup and Wells Fargo ‘Ready to Protect’
As for today, “the banks came together and said the government can’t bail us out, we can’t let the First Republic fall,” Bove said. “It is a message to everyone that we are here, ready to protect the industry.”
He and others point out that, unlike most banking crises, credit problems aren’t a factor in this one. “There were no bad loans, the economy is not in recession yet,” Bove said. “The banks are healthy. They were unique developments that had no right to endanger an entire industry.”
The trigger was that Silicon Valley Bank sold some of its bonds at a loss, prompting depositors to flee.
There is a huge psychological element in the crisis. Fear spreads quickly once bad news about a major bank breaks. And that leads nervous depositors to withdraw their money from banks across the country. “The banking system is a trust game,” Chris Litchfield, a retired hedge fund manager who is now a private investor, told TheStreet.com.
Trust will decide the fate of the First Republic
Jack Ablin, chief investment officer at Cresset Capital, says trust will ultimately determine the impact of the First Republic bailout. “I hope this resolves the current crisis,” he told TheStreet.com.
“But I would have thought the Fed endorsement (announced on Sunday) would do that.” To understand the impact of the First Republic bailout, “you’re trying to predict crowd psychology,” Albin said. “I already have it hard enough with mine.”
As for the First Republic itself, the bailout was less than ideal, Litchfield said. “A better solution would have been to find a merger partner, but that was an unattractive goal.” The rescue package may have been the most viable option, he said. “A capital injection is better than the feds taking over.”
