Deposit drain from small banks into JPM, WFC, C slowed

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First Republic Bank headquarters is seen on March 16, 2023 in San Francisco, California, United States.

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The increase in deposits being shifted from smaller banks to large institutions, including JPMorgan Chase And Wells Fargo amid fears over the stability of regional lenders has slowed to a trickle in recent days, CNBC has learned.

The uncertainty caused by the collapse of Silicon Valley Bank earlier this month has prompted outflows and falling share prices at its peers, including First Republic and PacWest.

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The situation, which rocked markets worldwide and forced US regulators to step in to protect bank customers, began to improve around March 16, people with knowledge of inflows at top institutions said. At that point, 11 of America’s largest banks combined to inject $30 billion into First Republic, essentially repaying some of the deposits they had recently received.

“People who were panicking came out right away,” the person said. “If you haven’t decided yet, probably stay where you are.”

The development gives regulators and bankers breathing room to address the tensions in the US financial system that arose after the collapse of the SVB, the go-to place for venture capitalists and their companies. Its implosion happened at dizzying speed this month, boosted by social media and the ease of online banking, in an event likely to impact the financial world for years to come.

Within days of its March 10 seizure, another specialist lender-signature bank was shut down, and regulators resorted to emergency powers to stop all of the two banks’ customers. Waves of this event reached the world, and a week later Swiss regulators forced a long-rumored merger between them UBS And Swiss credit to increase confidence in European banks.

Wear lots of hats

The momentum has set big banks like JPMorgan and Goldman Sachs in the awkward position of playing multiple roles at once in this crisis. Big banks are advising smaller ones as they engage in moves to rebuild confidence in the system and prop up troubled lenders like First Republic, while still being able to attract billions of dollars in deposits and potentially bid on assets when they’re up for sale .

The breadth of these flows is evident in Federal Reserve data released Friday, a belated March 15 deposit snapshot. While big banks appeared to gain deposits at the expense of smaller ones, the filings don’t capture SVB’s outflows because it was in the same category of big banks as the companies that made its dollars.

Though inflows into a top institution have slowed to a “trickle,” the situation is fluid and could change if concerns arise about other banks, said a person who declined to be identified ahead of the release of next month’s financials to become. JPMorgan starts the reporting season for banks on April 14th.

Another large West Coast-based lender has seen inflows only slow in recent days, according to another person with knowledge of the matter.

Representatives from JPMorgan, Bank of America, Citigroup and Wells Fargo declined to comment on the article.

Post SVB playbook

According to Brex co-founder Henrique Dubugras, the moves reflect what a newer player has also seen. His startup, which targets other VC-backed growth companies, has seen a surge in new deposits and accounts following the SVB collapse.

“Things have certainly calmed down,” Dubugras said in a phone interview with CNBC. “There was a lot of back and forth, but people are still putting money in the big banks.”

The post-SVB playbook, he said, envisions startups holding cash at regional banks or new entrants like Brex for three to six months, while parking the rest at one of the four biggest players. That approach combines the service and features of smaller lenders with the perceived safety of banks that are too big to fail for the bulk of their money, he said.

“A lot of founders opened an account at a Big Four bank, moved a lot of money there, and now they’re remembering why they didn’t do that from the start,” he said. The biggest banks have historically ignored risky startups, which was the domain of specialized lenders like SVB.

Dubugras said JPMorgan, the largest US bank by assets, was the biggest deposit gainer among lenders this month, partly because VCs flocked to the bank. This belief was supported by anecdotal reports.

The next domino?

Right now, all attention is on First Republic, which has faltered over the past few weeks, with shares down 90% this month. The bank is known for its success in servicing affluent customers on both the east and west coasts.

Regulators and banks have already put together a remarkable suite of measures to bail out the bank, mainly as a sort of firewall against another wave of panic that would engulf more lenders and strain the financial system. Behind the scenes, regulators believe First Republic’s deposit situation has stabilized, Bloomberg reported on Saturday.

First Republic has hired JPMorgan and Lazard as advisors to find a solution that could include finding more capital to remain independent or selling it to a more stable bank, people familiar with the matter said.

If those fail, there is a risk regulators will have to seize the bank, similar to what happened with SVB and Signature, they said. A spokesman for the First Republic declined to comment.

While smaller banks’ deposit flight has slowed, recent weeks have revealed a glaring weakness in the way some have been managing their balance sheets. These companies were caught flat-footed when the Fed launched its most aggressive rate hike campaign in decades, causing them unrealized losses on bond holdings. Bond prices fall when interest rates rise.

It is likely that other institutions will face upheaval in the coming weeks, Citigroup said CEO Jane Fraser in an interview on Wednesday.

“There could well be some smaller institutions that have similar problems if they get caught not managing their balance sheets as adeptly as others,” Fraser said. “We definitely hope that it will be less rather than more.”

How the Silicon Valley Bank Collapsed