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- JPMorgan (JPM), Bank of America (BAC), Wells Fargo (WFC), and some other major banks raised $30B to save First Republic Bank.
- The recent banking crisis sparked fears, but FRC was rescued.
Big banks like JPMorgan, Citigroup, Bank Of America, and Wells Fargo raised $30 billion, saving the First Republic Bank (FRC). Major banks came together, creating a pool to save FRC, $5 billion came from the top three, Goldman Sachs and Morgan Stanley offered $2.5 billion each, while BNY Mellon, State Street Corp., and PNC Bank handed $1 billion each.
Why FRC Needed Rescuing?
Signature Bank and SVB failed in a matter of days; this situation created tension for the First Republic Bank, as they lost one-third of their value on Thursday but resumed slightly after bailout speculations.
Other banks must come to the rescue as the First Republic Bank would not have benefitted from the Federal Reserve’s new Bant Term Funding Program (BTFP). The program is available to banks in need and has eligible securities like the US Treasuries, agency debt, or mortgage-backed securities on their balance sheets.
First Republic Bank and many other regional banks do not have sufficient and meaningful exposure to the securities legitimated by BFTP. Hence they cannot take advantage of such a program. As the business models of regional banks vastly vary from the ikes of SVB. Mostly because retail investors’ deposits are likely to be smaller. Hence disqualifying them from borrowing funds under the Fed’s program.
In a group statement, all the generous banks said they garrison their financial strength and liquidity to a larger system, where it is most required. Smaller and medium-sized banks work on the grass root level, support local customers and businesses, help improve communities and generate millions of jobs. Larger banks of America are standing alongside all banks supporting the economy.
This can notably come forth as a humanitarian gesture from the larger banks, as they came together to support the smaller ones from falling into the abyss. The recent banking crisis in the United States, coupled with the credit crunch and supposedly approaching recession, has created panic among everyone in the industry. Though measures are being taken to minimize the losses, much remains to be done.
Regional Banks alarmed by BFTP
The Federal Reserve’s Bank Term Funding Program (BFTP) does not help regional banks like the First Republic Bank, mainly due to the huge difference in the risk factors which caused SVB and Signature to close. The program is supposed to offer a lifeline to ailing banks.
BTFP will loan struggling banks up to a year if the receiver pledges certain predefined securities as collateral. This criterion makes it tough for the region to take advantage of even if needed. The program helps larger banks with ample liquid securities with them. But rarely any regional bank can fulfill the criteria; they might never have enough securities for collateral.
For instance, the First Republic Bank had only $10 billion it could have kept as collateral in the balance sheet of approximately $200 billion. Even after being badly in need of funding, it cannot get it simply because it does not fulfill the criteria.
What differentiates Regional Banks from Others?
A major difference is that regional banks have an amalgamation of retail and commercial depositors. If the data is believed, Neither SVB nor Signature had any retail customers. These retail depositors also, in a way, protect these regional banks from getting into a situation like SVB, with a $250,000 FDIC insurance.
The majority of the retail customer’s deposits never exceed $250,000; thus, they are insured with FDIC. But the commercial accounts can exceed the limit, losing insurance.
Steve Anderson is an Australian crypto enthusiast. He is a specialist in management and trading for over 5 years. Steve has worked as a crypto trader, he loves learning about decentralisation, understanding the true potential of the blockchain.
