Shares of First Republic Bank Plunge Amid Contagion Fears for U.S. Regional Banks

On Sunday, First Republic announced it had secured additional liquidity from the Federal Reserve and JPMorgan Chase. This has increased the bank's unused liquidity to a total of $70 billion, excluding any funding that could be obtained via a new facility from the Fed. To provide banks with up to one year of loans, the Federal Reserve has set up a Bank Term Funding Program, whereby high quality collateral such as Treasury securities will be accepted as security.

Monday saw First Republic Bank's share price tumble sharply, despite the extraordinary measures taken by regulators on Sunday to protect depositors of Silicon Valley Bank, Signature Bank and offer additional funding to other troubled banking groups.

The San Francisco-based bank saw its share price plunge by 61.8%, while PacWest Bancorp, Western Alliance Bancorp and Zions Bancorporation witnessed respective declines of 45%, 47% and 26%. Similarly, KeyCorp and Bank of America had their shares drop 27% and 5.8% respectively, and Charles Schwab's plummeted by over 11%.

The day saw several instances of high volatility in the bank stocks, leading to multiple halts in trading.

Despite the Federal Reserve's announcement on Sunday that it would create a new Bank Term Funding Program offering loans to banks for up to a year against high-quality collateral such as Treasurys, and its easing of conditions at its discount window, equity markets still saw declines.

First Republic Bank reported on Sunday that it had obtained additional liquidity from the Federal Reserve and JPMorgan Chase, bringing its unused liquidity to $70 billion before any possible funding from the new Fed facility.

First Republic’s capital and liquidty position remain strong, with the bank’s capital exceeding the regulatory threshold for well-capitalized banks, according to a statement from founder Jim Herbert and CEO Mike Roffler. Herbert also affirmed to CNBC’s Jim Cramer that the bank is still functioning as usual and has not seen any significant outflows of depositors. Western Alliance similarly reported moderate outflows and announced that it has taken additional measures to ensure its liquidty. Meanwhile, the SPDR S&P Regional Banking ETF

Monday saw a slide in regional bank stocks following the rush of withdrawals from SVB Financial that resulted in the bank having to close. Notably, a concerning aspect was the fact that most of SVB's customers had accounts that were not protected under deposit insurance, meaning they would not have their funds returned prior to the regulatory steps taken over the weekend.

Although SVB had an especially high concentration of non-insured deposits, there could be other midsized banks that are at a risk because of potentially hefty withdrawals.

Citi analyst Keith Horowitz believes that regionals with smaller, less diverse uninsured deposit bases may be vulnerable to deposit flight, but that they should have time to access wholesale funding markets (such as FHLB) and replenish their cash reserves. Horowitz cautions that banks should be careful about the negative implications that could come from raising deposit rates to keep deposits in the current fragile environment.

The collapse of SVB, with $212 billion in assets, was the largest U.S. bank failure since 2008. At the end of 2020, First Republic reported approximately $213 billion in assets, according to a securities filing.

One of the initial effects of the collapse of SVB is likely to be the exodus of uninsured deposits from smaller, less diversified financial institutions to larger, more diverse banks, as stated in a note to customers from Oppenheimer analyst Chris Kotowski. This could be particularly true for First Republic, which caters to businesses and wealthy individuals who typically have large uninsured deposits.