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

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

Shares in First Republic were down 67 per cent, PacWest and Zions fell by roughly 44 per cent and East West was off 27 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.

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 with balances above the $250,000 covered by federal insurance.

“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. 

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 is closely monitoring the situation at First Republic, which serves wealthy clients, and is ready to intervene if the San Francisco-based financial institution comes under stress due to a run on it, said a person with direct knowledge of the matter. 

If required, the FDIC would be prepared to take over the bank, wiping out shareholders and bondholders to protect depositors as it did with Silicon Valley Bank 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. 

US Treasury secretary Janet Yellen and President Joe Biden 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 by 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 due to 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.

Trading in First Republic and PacWest was halted briefly on Friday due to volatility.