First Republic shares fall sharply as Yellen says Treasury won’t insure all deposits

NEW YORK, March 22 (Reuters) – As beleaguered First Republic Bank ( FRC.N ) considers its options, Treasury Secretary Janet Yellen said on Wednesday there is no discussion about all-deposit insurance, making a “bull case” -scenario more difficult for the Share.

First Republic, whose shares have lost much of their value since the banking crisis began in the US on March 8, is among the banks talking to peers and investment firms about potential deals in the wake of US regulators̵[ads1]7; takeover of Silicon Valley Bank (SIVB). O) and Signature Bank (SBNY.O) this month after bank runs.

Morgan Stanley analyst Manan Gosalia, in a report earlier this week, set a $54 price target on First Republic shares, which fell 15.5% to close at $13.33 on Wednesday. The optimistic case was based on a scenario where the Federal Deposit Insurance Corporation (FDIC) insures all consumer deposits, according to the report.

That hope was dampened Wednesday, after Yellen told a hearing of the US Senate Appropriations Subcommittee on Financial Services that the government “is not considering insuring all uninsured bank deposits.” She added that the Ministry of Finance has not considered anything to do with guarantees for assets.

Those comments affected all regional bank stocks, said RJ Grant, head of trading at Keefe, Bruyette & Woods. “Yellen clearly struck a different tone, there was a sense that there were conversations behind the scenes in Washington that depositors would be protected.”

JPMorgan ( JPM.N ) Chief Executive Officer Jamie Dimon is scheduled to meet with Lael Brainard, the director of the White House’s National Economic Council, during the leader’s planned trip to Washington, according to a person familiar with the situation. The meeting was pre-planned and Reuters could not determine what was on the agenda. It comes as First Republic Bank’s efforts to secure a capital infusion continued Wednesday.

The Morgan Stanley report believed that a potential extension of FDIC insurance could bring back a majority of First Republic’s customers. Banks involved in First Republic’s bailout negotiations are asking for a loss-sharing arrangement with the U.S. government similar to the terms UBS Group ( UBSG.S ) agreed to in its emergency takeover of rival Credit Suisse, according to an industry source.

The acquirer will receive support if, after buying First Republic, it finds a bigger-than-expected loss, added the source, who requested anonymity to disclose private conversations.

First Republic declined to comment.

The bank is looking at ways it could downsize if efforts to raise new capital fail, Reuters reported on Tuesday, citing three people familiar with the matter.

Even if it achieves a cash infusion, the lender will likely have to take losses on securities in its so-called held-to-maturity portfolio, the Morgan Stanley analysts wrote.

A potential buyer would have to absorb $26.8 billion in mark-to-market losses from First Republic’s loan and securities portfolios, while an additional $9.5 billion would be needed to recapitalize the bank, Morgan Stanley analysts estimated.

At worst, First Republic’s shares would drop to just $1, Morgan Stanley analysts estimated.

Citigroup withdrew its estimates for First Republic on Tuesday and put the stock under review. Analysts Arren Cyganovich and Kaili Wang said in a report that “some form of government intervention seems increasingly likely, although in what form remains unclear.”

Reporting by Tatiana Bautzer and Chris Prentice in New York Additional reporting by Sinead Carew in New York Editing by Lananh Nguyen, Nick Zieminski and Matthew Lewis

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