First Republic shares fall as Yellen says it is not considering “universal insurance” on bank deposits

NEW YORK (Reuters) – A “bull case” scenario for shares of the beleaguered First Republic Bank is seen as making its options more difficult on Wednesday after Treasury Secretary Janet Yellen said there was no discussion of insurance. For all bank deposits without approval from the US Congress.

First Republic, whose shares have lost much of their value since the US banking crisis began on March 8, is among the banks talking to peers and investment firms about potential deals in the wake of US regulators’ takeover of Silicon Valley Bank (SIVB). O) and Signature Bank (SBNY.O) after operating banks.

Morgan Stanley analyst Manan Gosalia, in a report earlier this week, set a $54 price target for First Republic shares in the best-case scenario. The stock closed Wednesday at $13.33, down 15.5%. The optimistic case was based on a scenario in which the Federal Deposit Insurance Corporation (FDIC) insures all consumer deposits until the end of the banking crisis, resulting in the return of the majority of customer deposits, according to the report.

That hope waned on Wednesday, after Yellen told a US Senate Appropriations Subcommittee hearing that she was not considering such a move without congressional approval and was reviewing banking risks on a case-by-case basis.

“I didn’t think about or discuss anything related to comprehensive insurance or deposit guarantees,” she said.

On Tuesday, she said the Treasury and regulators have a “firm commitment” to protecting deposits of smaller institutions, including community banks.

RJ Grant, head of trading at Keefe, Bruyette & Woods, said her recent comments affected all regional bank stocks.

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“Yellin is definitely a different tone,” Grant said. “There was a sense that there were talks behind the scenes in Washington that depositors would be protected.”

JPMorgan (JPM.N) CEO Jamie Dimon met with Lyle Brainard, director of the White House National Economic Council, on Wednesday during a scheduled trip to Washington, according to a person familiar with the situation. The meeting agenda was unclear. This came as First Republic continued efforts to secure an infusion of capital.

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

The source, who asked not to be identified to reveal private conversations, added that the buyer will be supported if, after the First Republic purchase, it finds a bigger loss than expected.

First Republic declined to comment.

Reuters reported, citing three people familiar with the matter, that the bank is looking at ways to reduce its size if attempts to raise new capital fail.

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

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

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Morgan Stanley analysts estimated that in a worst-case scenario, First Republic shares would drop to just $1.

Citigroup withdrew its assessment of First Republic on Tuesday and put the stock under review. “Some form of government intervention seems increasingly likely, though in what form it remains unclear,” analysts Arin Ciganovich and Kylie Wang said in a report.

Additional reporting by Tatiana Pautzer and Chris Prentice in New York Additional reporting by Sinead Caro in New York Editing by Lanan Nguyen, Nick Zieminski, Matthew Lewis and Leslie Adler

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