After a downgrade in credit rating, First Republic shares plunge more than 46%

After reports that First Republic Bank’s shares crashed by more than 46% Monday, there were concerns that the bank, based in San Francisco, may need to raise additional funds despite receiving a $30bn rescue ($24bn), last week.

S&P Global downgraded the regional bank’s credit rating further into junk status as the banking crisis grew. According to the agency, the bank, which caters primarily to wealthy clients, was likely experiencing “high liquidity stress and substantial outflows”.

Bloomberg reported Monday night that US officials are looking at ways to temporarily increase the protection offered by Federal Deposit Insurance Corp (FDIC), to all banking customers. This would include all deposits beyond the current $250,000 limit.

A large number of First Republic customers have more than $250,000 in federal insurance, just like the Silicon Valley Bank (SVB) that collapsed.

The move could face political obstacles. On Monday, hardline Republicans in Congress vowed to resist any extension of cover.

In a statement, the Republican House Freedom Caucus stated that “any universal guarantee on bank deposits, implicit or explicit, enshrines danger precedents that simply encourage future irresponsible behaviour to be paid for, regardless of who was involved in following the rules.”

First Republic’s troubles follow the collapses of SVB and New York-based Signature. Credit Suisse was the biggest institution to be involved in the turmoil when the Swiss government forced it into a cut price takeover by rival UBS.

First Republic has not been able to reassure depositors that they will not be subject to the same fate of Signature and SVB. The bank borrowed more money from the US Federal Reserve last week and then stopped paying its common stock dividend, despite having $176bn of deposits and assets worth $213bn.

Reuters reported on Sunday that the lender was still trying a deal to raise capital. This comes days after JPMorgan Chase and Citigroup raised $30bn.

Jamie Dimon, JP Morgan CEO reported that efforts are underway to provide First Republic with new support.

The First Republic CEO Jim Herbert and Mike Roffler stated in a regulatory filing that the cash injection was a “vote of confidence for First Republic” and the entire US banking industry.

First Republic shares lost 80% over the past 10 day due to fears of a bank ran. According to Bank of America, 70% of First Republic’s deposits are not insured, which is well above the average of 55% for medium-sized banks. This puts First Republic third behind Signature Bank (90%), and SVB (94%)

First Republic reported Friday that its lending business revolves around the provision of large mortgages to clients such as Mark Zuckerberg. Analysts are concerned about dependence on commercial, personal and property loans as they can’t be quickly liquidated.

First Republic has experienced large outflows of funds, at $70bn, despite assurances from US banking officials, Joe Biden (the US president), that deposits in midsize banks will be safe, regardless of their amount. The bank stated in a regulatory filing that borrowings from the Federal Reserve ranged from $20bn up to $109bn between 10 March and 15 March.

Mohamed El-Erian, an economist who is also president of Queens College at the University of Cambridge, stated that people are moving deposits in a way that is probably not rational, but completely understandable. “Where are they moving deposit out of?” He added that the smaller banks and those in regional areas were being moved into larger banks.

It has been noted that banks who stepped in to help the bank are the same banks that will reap the benefits of wealthy depositors removing the money.

CNBC reported Monday First Republic had hired an Investment Bank to help it evaluate potential options. However, a $25bn gap in its balance sheet was still a barrier to any deal. While the bank’s share value continues to decline, other regional or mid-sized banks have seen modest increases in their share values.

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