First Republic rallies as Yellen says US prepared to give more support

Shares of First Republic and other regional US banks rallied on Tuesday after Janet Yellen said the government stood ready to provide further support for smaller lenders if needed.

In an intervention designed to shore up confidence in the banking system after more than a week of turmoil, the US Treasury secretary said guarantees offered to depositors in the failed Silicon Valley Bank could be replicated at other institutions.

“The steps we took were not focused on aiding specific banks or classes of banks,” Yellen said in a speech to the American Bankers Association on Tuesday, which marked her most extensive comments yet on the banking turmoil.

“Our intervention was necessary to protect the broader US banking system,” she added. “And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.”

Shares of First Republic, which have fallen about 85 per cent this month, rose more than 52 per cent in early afternoon trading in New York, leading a broader rally in US lenders. US Bancorp, KeyCorp and Zions rose between 6 and 9 per cent. The KBW Bank Index was up 5 per cent.

Casey Haire, US banks analyst at Jefferies, said Yellen’s public remarks had reassured investors. “Having the Treasury secretary comment that they would step in as necessary is the clearest sign yet regulators could act.”

The Treasury worked with the Federal Reserve and the Federal Deposit Insurance Corporation to provide guarantees for all deposits at failed SVB and Signature Bank, including those higher than the $250,000 threshold that are not covered by government insurance. In addition, the Fed announced a new facility to boost liquidity for struggling banks.

While Yellen defended the “decisive” and “forceful” steps taken by regulators to avert a broader banking crisis in the US, the problems afflicting smaller institutions are far from resolved. A $30bn lifeline put together by Wall Street bank chief executives — and cheered by the US government — had initially failed to arrest the previous sharp sell-off in the shares of First Republic Bank.

In Europe, the turmoil that followed SVB’s collapse contributed to the collapse of Credit Suisse, which UBS has agreed to buy in a deal wiping out $17bn of bonds.

Since SVB’s crisis was brought to a head by the impact of interest rate rises on the bank’s bond portfolio, the problems afflicting the sector are also weighing on central banks. The Fed’s open market committee meets on Wednesday to decide whether to press ahead with a quarter-point rate rise or forgo an increase to help stabilise the financial system.

Yellen suggested concerns in the US had been eased to some extent by market developments in recent days. “The situation is stabilising. And the US banking system remains sound,” she said. “Aggregate deposit outflows from regional banks have stabilised.”

“We are squarely focused on doing our job,” she added. “And you should rest assured that we will remain vigilant.”

Yellen stressed the current turmoil was different to that of the global financial crisis. “Back then many financial institutions came under stress due to their holdings of subprime assets. We do not see that situation in the banking system today,” she said. “Our financial system is also significantly stronger than it was 15 years ago. This is in large part due to post-crisis reforms that provided stronger capital standards, among other important improvements.”

Yellen pointed to the importance of small and midsized banks to the US economy. A concern in recent days has been that the current crisis would strengthen larger financial institutions at the expense of smaller ones.

“Large banks play an important role in our economy, but so do small and midsized banks,” she said. “These banks are heavily engaged in traditional banking services that provide vital credit and financial support to families and small businesses. They also increase competition in the banking sector, and often have specialised knowledge and expertise in the communities they invest in.”

As well as aiding individual bank depositors, US officials are also debating whether they need to take additional steps to restore confidence, including increasing or removing the $250,000 cap for deposits insured by the FDIC.

Congressional support would be required for such a step unless Biden administration officials find a way to adopt the measure by executive action. In her speech, Yellen nodded to the potential for new banking reforms to strengthen regulation in the sector.

“We are currently focused on the situation at hand. But we will need to re-examine our current regulatory and supervisory regimes and consider whether they are appropriate for the risks that banks face today,” she said. “We all share an interest in ensuring that the United States remains the strongest and safest financial system in the world.”