First Republic and other US regional banks tumble over fears of deposit flight

Shares in First Republic and several other US regional banks tumbled on Monday as investors worried that the weekend actions of the Federal Reserve and the Treasury were not sufficient to stem deposit outflows.

First Republic’s stock fell 75 per cent, while Arizona-headquartered Western Alliance Bank was down 80 per cent. Trading in shares of both banks was halted because of volatility.

PacWest shares halved and Zions dropped more than a quarter. Charles Schwab, the retail broker that also operates a bank subsidiary, fell 8.5 per cent.

Investors dumped the stocks even after the Fed and Treasury boosted lenders’ access to quick cash following the government takeovers of Silicon Valley Bank and Signature Bank.

The sell-off continued despite a pledge from US president Joe Biden to do “whatever is needed” to protect bank deposits as he sought to reassure Americans their money was safe.

“We will not stop at this,” he added, referencing the US government’s actions at the weekend. “We’ll do whatever is needed on top of all [this].”

SVB was taken over by the government on Friday following a run on its deposits and a collapse in its stock price amid fears it was struggling for capital. On Sunday, regulators took over Signature Bank, which had close ties to the crypto sector.

Monday’s sell-off was driven in part by fears that other regional banks could see a run by depositors similar to the ones that brought down their rivals, particularly by clients, including small businesses with balances above the $250,000 covered by federal insurance.

The Russell 2000 index of small-cap stocks was down 2 per cent even as the blue-chip S&P 500 was flat.

“The reality is that all kinds of market participants are nervous,” said Mayra Rodriguez Valladares, a regulatory consultant. “Everyone is wondering, ‘What if I have assets at Bank A or B or C?’”

First Republic on Sunday shored up its finances with funding from the Fed and JPMorgan Chase as fears of contagion spread among regional lenders. The bank said the funding gave it $70bn of unused liquidity, excluding money available from the Bank Term Funding Program announced on Sunday.

However, the steep decline in its share price has put pressure on First Republic, which has $213bn in assets and caters to wealthy individuals.

After news of SVB’s collapse broke on Friday, the chief financial officer of one technology start-up in San Francisco told the Financial Times that he went directly to First Republic to withdraw his company’s funds.

The US government was closely monitoring the situation at First Republic and was ready to intervene if the San Francisco-based financial institution came under stress in the event of a run on it, said a person with direct knowledge of the matter.

If required, the Federal Deposit Insurance Corporation would be prepared to take over the bank, wiping out shareholders and bondholders to protect depositors as it did with SVB and Signature, said a person with first-hand knowledge of the plan being developed by US officials.

First Republic was believed to be in a better position than SVB and Signature as of late Sunday, which was why it was not taken over and included in the backstop plan for the two failed banks, said the person with direct knowledge of the matter.

Biden and US Treasury secretary Janet Yellen were hoping that the actions taken to protect depositors at SVB and Signature would reassure account holders at First Republic.

There are no white knights lined up to rescue First Republic so far, according to people with knowledge of the matter.

Shares of PacWest, a smaller Los Angeles-based bank, fell 55 per cent last week, including a 37 per cent plunge on Friday alone. It said on Friday that it had $33.2bn in deposits, basically unchanged from $33.9bn at the end of 2022, and that its loan balances of $28.5bn were slightly smaller because of a strategic decision to strengthen its balance sheet.

More than half of PacWest’s deposits, 52 per cent, were uninsured at the end of last year, according to its securities filings.

Shares in Western Alliance, Customers Bancorp, Bank of Hawaii, PacWest, First Republic, EastWest, First Horizon, Macatawa, Zions and Charles Schwab were all paused for market volatility on Monday morning, although they generally resumed trading within minutes.