Big Banks That Shored Up First Republic Pushed to Boost Reserves

(Bloomberg) — The biggest US banks are planning to bolster reserves in a move tied to their unusual effort to shore up ailing lender First Republic Bank last month.

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Some of the banks that contributed the largest chunk of the $30 billion in deposits are planning to set aside about $100 million each, according to people with knowledge of the matter. The group included JPMorgan Chase & Co., Wells Fargo & Co., Citigroup Inc. and Bank of America Corp., which each put up $5 billion.

Accounting rules meant to ensure banks stockpile provisions to cover potential losses for a wide range of assets are dictating the move, two of the people said, asking not to be identified discussing private information.

The cash infusion was intended to be a vote of confidence in the banking system, with executives expecting to fully recover their deposits. Still, the reserves are an acknowledgment that the decision to park their money with First Republic for at least 120 days wasn’t entirely risk free.

Representatives for the four biggest banks as well as Morgan Stanley and Goldman Sachs Group Inc. declined to comment. The amount set aside by each bank will likely vary according to the size of their contribution. The provision will have minimal impact on the earnings of the lenders who post billions of dollars in profit every quarter.

The 11 banks pledged the deposits for First Republic after the collapse of two other regional banks sparked panic among customers who rapidly pulled their money. The move — spearheaded by JPMorgan Chief Executive Officer Jamie Dimon and Treasury Secretary Janet Yellen — was designed to buy more time as First Republic explores strategic options.

Analysts at Wedbush Securities speculated this week that a sale will be unlikely without the company falling into government receivership. First Republic at the start of the quarter was sitting on almost $27 billion in markdowns on loans and a bevy of unrealized losses on treasuries and other long-dated bonds on the company’s balance sheet. In an acquisition, those would more than wipe out the company’s tangible common equity.

“The unrealized losses embedded in its balance sheet prevent a voluntary M&A sale of the company,” David Chiaverini, an analyst at Wedbush Securities, said in a note to clients. “The only acquisition scenario that is possible for FRC, in our view, is through receivership, in which a would-be acquirer is able to take advantage of an FDIC-assisted bargain purchase.”

First Republic saw about 90% of its market cap evaporate as the stock collapsed last month. After dropping to a low of $12.18 on March 20, it has remained steady around that level since then, closing at $14.13 on Tuesday.

–With assistance from Max Reyes.