The $30 billion deposit in First Republic Bank from 11 top U.S. lenders creates a “false sense of confidence” in the San Francisco lender, warns Pershing Capital Management CEO Bill Ackman.
“The result is that FRB default risk is now being spread to our largest banks,” the hedge fund manager tweeted Thursday, Business Insider reports.
“Spreading the risk of financial contagion to achieve a false sense of confidence in FRB is bad policy,” Ackman said.
The growing problem at First Republic Bank days after the sudden collapse of Silicon Valley Bank and Signature Bank less than a week ago, is a systemic problem that must be handled by the U.S. government, Ackman said.
“We are well beyond the point where the private sector can solve the problem and are in the hands of our government and regulators,” Ackman said.
“Hours matter. We have allowed days to go by. Half measures don’t work when there is a crisis of confidence. Confidence is destroyed quickly and can take years and sometimes decades to be restored,” he urged. “Tick-tock.”
Guarantee All US Bank Deposits
Ackman said he is pressing for immediate action by the government to temporarily guarantee all U.S. bank deposits immediately until it can be expanded and modernized.
“We live in a world with @Twitter-speed spread of information and smart-phone-enabled accounts where withdrawals can be made with the push of a button, no bank is safe from a run unless the depositor has an explicit gov't guarantee that ensures that they always have complete access to the total value of their deposits.”
Ackman says the FDIC's actions in the past week have created a three-tier banking system:
1.) SVB and Signature "bridge banks" with guarantees on all deposits;
2.) Systemically important banks (SIBs), which have implicit guarantees on all of their deposits; and
3.) All other banks
The U.S. has guaranteed all access deposits at SVB and Signature Bank, New York, not just those up to $250,000, as insured by the Federal Deposit Insurance Corporation. The FDIC guarantees up to $250,000 per account owner, per ownership category.
Thursday, First Republic Bank received $30 billion in deposits from several big banks, the bank said in a statement late in the day, as part of a rescue package for the lender.
JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp., Wells Fargo & Co., Goldman Sachs Group Inc., Morgan Stanley and others were involved in the rescue, according to the statement.
U.S. Treasury Secretary Janet Yellen and JP Morgan CEO Jamie Dimon first discussed using deposits from large banks to support First Republic Bank Tuesday, and drummed up participation by other banks over the past two days, sources familiar with the rescue effort said.
Citigroup CEO Jane Fraser also played a key role in reaching out to other banks, the sources said.
Banking Sector Rattled
The banking sector has been rattled by the failure of SVB and Signature Bank, New York, generating fears of contagion that could lead to a run on other banks, their failure and the potential for the next banking crisis.
Indeed, banking giants, including Bank of America, Citigroup and JPMorgan Chase, have received a massive infusion of deposits this week, according to multiple reports, including the Financial Times on Tuesday.
First Republic has been assuring its customers of its liquidity since the implosion of SVB. First Republic announced Sunday it was getting $70 billion of funding from the Federal Reserve and JPMorgan Chase.
Nevertheless, S&P Global and Fitch cut the bank’s credit rating due to their concerns over customers withdrawing funds.
First Republic Bank (FRC) closed 10% higher at $34.27 Thursday. The stock was 7.27% lower at $31.78 in Friday premarket trading at 7:15 a.m. EST.
Ackman said he is calling for action by the U.S. government over concerns for U.S. banking and that he does not hold any bank investments, long or short.
The billionaire also said First Republic Bank is a well-run bank: “FRB is no SVB. It is a well-managed, well-capitalized, high-service bank with good assets that is beloved by its clients. It is caught up in a bank run due to no fault of its own. It does not deserve to fail.”
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