First Republic Bank Goes Big for US Regulators After Credit Suisse Sale

As nervous markets prepare to open on Monday, the top concern for US officials is First Republic Bank.,

FRC -32.80%

which demanded bailout funding last week from a group of the country’s biggest banks. The stabilization of the First Republic and other regional creditors in the coming days will determine whether additional private or government assistance is needed for the banks.

In Switzerland, the drop in confidence led to the sale of Credit Suisse for more than $3 billion. Regulators globally feared that a collapse of Credit Suisse, a systemically important financial institution, could ripple through major banks in several countries. In the US, the President’s Working Group on Financial Markets, which includes Federal Reserve and Treasury Department officials, met to monitor the situation.

After the Credit Suisse acquisition was announced on Sunday, Treasury Secretary Janet Yellen and Fed Chair Jerome Powell welcomed the deal as they tried to reassure American investors. “The US banking system’s capital and liquidity positions are strong and the US financial system is resilient,” the two said in a joint statement.

In the US, the First Republic has become the latest pressure point. Its shares fell more than 80% in March. Customers have withdrawn about $70 billion in deposits, nearly 40% of the total, according to people familiar with the matter. But withdrawals stabilized on Friday after the country’s biggest banks came to the rescue, the people said.

That slowdown and the $30 billion in new deposits from 11 of the biggest banks gave the First Republic a chance to consider its future options.

“First Republic Bank is well positioned to manage short-term deposit activity,” a bank spokesman said Sunday.

Regulators were also relatively quiet over the weekend, worried that after two weeks of intervention in the banking sector, too much activity, too soon, would signal nervous markets that the regulatory work done so far was insufficient. Other actions, in the current situation, may also discourage potential applicants to the bank in difficulty.

First Republic discussed with consultants other potential solutions, such as a share sale, before the bank bailout. Those options remain on the table, the people said. While bankers this weekend continued to debate possible next steps, no deal appeared imminent. First Republic leaders hope to prove the bailout deal has stabilized the creditor and avoid liquidation prices, the people said.

Still, with shares falling sharply on Friday and analysts warning that the rescue plan has not patched a hole in the bank’s balance sheet, investors and analysts alike are questioning just how stable First Republic is and how long it can hold out.

Analysts said First Republic has yet to raise funds or sell itself because it is suffering losses similar to those that helped sink Silicon Valley Bank earlier this month. For example, analysts at Wedbush said that any acquirer would have to fill a $13.5 billion capital hole in First Republic.

On Sunday, S&P Global Ratings cut First Republic’s credit rating for the second time in the past week.

How First Republic fares in the markets could determine whether major banks, including JPMorgan Chase & Co., Bank of America Corp.

Citigroup Inc.

and Wells Fargo & Co., managed to contain the panic that gripped the banking system this month. And it will play a role in how the market turmoil will affect broader economic activity.

Market reaction to developments in the First Republic and Credit Suisse could influence how the Federal Reserve approaches its rate-fixing meeting this week, where policymakers face a balanced decision on raising interest rates by a quarter of a percentage point. or forego a raise altogether.

Fed officials quickly raised rates to slow the economy and fight inflation by tightening financial conditions, such as raising borrowing rates and lowering asset prices. A key question at their two-day meeting, which ends on Wednesday, is how much additional tightening they hope to get out of the turmoil in markets and the banking sector.

Central bank officials who say financial conditions are more at risk of tightening abruptly because of the banking shock may favor keeping their benchmark interest rate, currently between 4.5% and 4.75%. Those who see the effects as more likely to be temporary, contained or modest might argue in favor of going ahead with the next hike, aimed at cooling the economy, amid still-high inflation.

Meanwhile, the Fed, Federal Deposit Insurance Corp. and the Biden administration continue to study the question of whether and when they should look to provide more assistance to the banking sector, particularly smaller creditors.

At the time, regulators were inclined to wait and see how First Republic and its peers fared in the markets earlier this week. The calculation was that although the First Republic is weak, it is still viable. Therefore, action by the Fed or the government could be seen as overreacting and hampering private sector solutions, which would be the preferred outcome.

Last week, for example, senior Biden administration officials spoke with billionaire investor Warren Buffett as the banking crisis intensified. It was not immediately clear what was discussed; Mr. Buffett did not respond to requests for comment and the Treasury declined to comment.

On Sunday, House Financial Services Committee Chairman Patrick McHenry (R., NC) told CBS News that major US banks buying troubled smaller creditors is a possible solution to ensure that Americans continue to have confidence in the financial system.

“I think all options should be on the table. That’s what I’m considering legislatively, that’s what I would encourage the government to consider as well,” McHenry said.

While policymakers favor private action, there continue to be calls for bolder and broader measures, especially with regard to bank deposits. On Friday, the Mid-Size Bank Coalition of America urged regulators to immediately insure all US deposits for two years. In a letter, the group said deposits were leaving banks of all sizes and flooding the four largest banks, putting them all at risk of a broader panic.

“If another bank fails, it is very possible that customer panic will trigger a series of bank failures due to runs on depositor banks, regardless of the financial condition of the underlying banks,” the group wrote.

—Nick Timiraos, Andrew Restuccia, Rachel Louise Ensign, Ben Eisen, and AnnaMaria Andriotis contributed to this article.