First Republic, Regional Banks Won’t Benefit Much from Fed’s New Funding Program

The Federal Reserve’s Bank Term Funding Program, which came to the rescue of Silicon Valley Bank, will be of little help to regional lenders such as First Republic Bank (FRC) because their risks are different from the banks that failed, analysts said.

Key Takeaways

  • Bank Term Funding Program (BTFP) is available to banks in need that have eligible securities on their balance sheet.
  • Securities eligible for BFTP include U.S. Treasuries, agency debt, and mortgage-backed securities.
  • First Republic and other regional banks don’t have enough meaningful exposure to BFTP-eligible securities to take advantage of the program.
  • Regional banks’ business model differs from Silicon Valley Bank as retail investor deposits tend to be smaller and stickier

Regional Bank Model Hinders BTFP Use

The Bank Term Funding Program (BTFP) went into effect on Sunday and essentially offers a lifeline to ailing banks. The program will give struggling banks loans for up to one year if the institutions pledge eligible securities as collateral. These securities include U.S. Treasuries, agency debt, and mortgage-backed securities, among others.

“This particular program by the Fed doesn’t have an expansive list of eligible collateral,” said James Cox, managing partner at Harris Financial Group. “This is basically anything that the Fed buys in open market operations, which is largely Treasury securities and mortgage-backed securities.”

The criteria for collateral make it harder for regional banks to take advantage of the BFTP should they need it. The program can help larger banks that hold liquid securities on their balance sheets—but regional banks don’t often do that, and even if they did, it wouldn’t nearly be enough, said Joseph Wang, a former trader for the Federal Reserve Bank of New York and chief investment officer at Monetary Macro Investments.

“[I]f you’re a bank with a big securities portfolio that is underwater—so if you’re a bank that looks like Silicon Valley Bank—it can be a lifesaver,” Wang said. “But most regional banks don’t operate like Silicon Valley Bank. Most regional banks make loans and have some securities, but not that much.”

In the case of First Republic, the bank has only about $10 billion it can pledge as collateral and a balance sheet of about $200 billion, Wang said. “It’s not really going to make a big difference,” he said.

Lower Deposit Risk

One way that regional banks differ from the likes of Silicon Valley Bank is the mix of retail and commercial depositors.

According to data from Wedbush Securities, Silicon Valley Bank and Signature Bank had zero deposits, while 37% of First Republic deposits were from suchl customers. PacWest Bankcorp (PACW) and Western Alliance Bancorp (WAL) have about 5% of them.

“The concentration risk of depositors leaving is not there in a large regional bank,” Cox said.

Another reason why a retail deposit base protects regional banks from an SVB-like situation is the $250,000 FDIC insurance, Wang said. Many retail customers have balances below $250,000, while commercial accounts for businesses often can exceed that insured amount.

A rout in regional bank shares on Monday sparked fears of a widespread crisis. Although their shares recovered Tuesday. That doesn’t mean risk has vanished.

“The risk of a failure is never over,” Cox said. “It’s just greatly reduced.”

After 2008, regulations in the financial system reduced bank failures, Cox said.

“That doesn’t mean that if the real estate market drops, a large regional bank with heavy exposures and high-cost areas like California or Florida or whatever couldn’t have difficulties with liquidity or solvency at some point in the future,” he said.