The biggest U.S. banks have contributed $30 billion of deposits as a rescue package for beleaguered First Republic Bank (FRC).
So what does that mean for the banking crisis that has mushroomed over the past week? “That’s the end of the crisis,” veteran bank analyst Dick Bove, chief financial strategist at Odeon Capital Group, told TheStreet.com.
DON’T MISS: First Republic Stock Leaps On Report Banks Plan To Coordinate $30 Billion Deposit Rescue
JPMorgan Chase, Bank of America, Citigroup and Wells Fargo will kick in $5 billion of uninsured deposits each, while Goldman Sachs and Morgan Stanley will deposit $2.5 billion each. Other banks will provide smaller amounts.
The package reminds Bove of past financial crises when leaders of the biggest banks would join forces to quell the problems. “The big one was the Panic of 1907,” when J.P. Morgan’s intervention helped end the turmoil, Bove said.
JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo 'Ready to Protect'
As for today, “the banks got together and said the government can’t rescue us, we can’t have First Republic go down,” Bove said. “It’s a message to everyone that we’re here, ready to protect the industry.”
He and others note that unlike most banking crises, credit issues aren’t a factor in this one. “There weren’t bad loans, the economy isn’t yet in recession,” Bove said. “Banks are healthy. It was unique developments that had no right to cause a whole industry to get in jeopardy.”
The trigger was Silicon Valley Bank selling some of its bonds for a loss, prompting depositors to flee.
There is a huge psychological element to the crisis. Fear spreads quickly once bad news emerges about a sizable bank. And that leads jittery depositors to withdraw their money from banks nationwide. “The banking system is a confidence game,” Chris Litchfield, a retired hedge fund manager who is now a private investor, told TheStreet.com.
Confidence Will Decide First Republic's Fate
Jack Ablin, chief investment officer of Cresset Capital, says confidence in the end will determine the impact of the First Republic rescue. “I hope this solves the current crisis,” he told TheStreet.com.
“But I would have thought the Fed backstop [announced Sunday] would do that.” To understand the impact of the First Republic rescue, “you’re trying to predict mass psychology,” Albin said. “I have a hard enough time with my own.”
As for First Republic itself, the rescue wasn’t ideal Litchfield said. “A better solution would have been to find a merger partner, but it was an unattractive target.” The rescue package may have been the most viable option, he said. “A capital infusion is better than the feds taking over.”
