Shares of several regional lenders fell on Monday after the collapse of First Republic Bank FRC.N, the third major casualty of the biggest crisis to hit the US banking sector since 2008.
The crisis unraveled after the closure of Silicon Valley Bank and Signature Bank in March that led to deposit outflows from smaller lenders and fueled fears of similar liquidity crunches at peers.
The KBW Regional Banking Index .KRX was down 1.9% on Monday, while shares of Citizens Financial Group CFG.N, PNC Financial Services Group PNC.N, Truist Financial Corp TFC.N and U.S. Bancorp USB.N fell between 1.2% and 7%.
A deal was announced earlier on Monday that allows for an orderly failure of First Republic. Under the terms, JPMorgan Chase & Co JPM.N will pay $10.6 billion to the US Federal Deposit Insurance Corp (FDIC), which took FRC into receivership, for most of the failed bank's assets.
Shares of JPMorgan Chase were up 2%, making the largest US bank the top gainer on the Dow Jones .DJI.
"This deal does not change the rates, recession, and regulatory headwinds that regional banks are facing," said UBS analyst Erika Najarian, but added it is an elegant solution that should lay to rest outstanding investor concerns over liquidity.
Mid-cap banks, which have client deposits parked in rate-sensitive investment portfolios such as mortgage bonds, are also facing a massive challenge due to aggressive monetary policy tightening by the US Federal Reserve. Their portfolios are now worth far less than what they valued them at in their books.
While investors digested the rescue engineered over the weekend by regulators for First Republic's assets with a pinch of salt, Wall Street analysts were largely sanguine about the deal.
"This marks (the) second largest failure on record. Still, unlike Silicon Valley Bank and Signature Bank, the FDIC had a buy waiting in the wings," said analysts at Barclays.
UK govt says country's banking system safe and sound, after First Republic collapse
Britain's finance ministry said on Monday that the country's banking system remained safe, sound and well capitalized, after First Republic Bank FRC.N became the third major US bank to fail in two months.
"As the independent Bank of England has confirmed, the UK banking system remains safe, sound and well capitalized," a spokesperson for the Treasury said via e-mail.
The spokesperson also said First Republic was "a matter for US authorities."
FDIC sees promise in higher deposit insurance for business accounts
Significantly increasing the federal backstop for bank accounts used for payroll and other business needs is the "most promising option" for improving financial stability relative to bank risk-taking, the Federal Deposit Insurance Corp said in a report Monday.
The FDIC laid out the case for what it called 'targeted' deposit insurance coverage in a comprehensive overview of the federal deposit insurance system, one of three options it considered in the 76-page report. Such coverage has "significant" unresolved challenges, the report said, including how to define such accounts and prevent depositors and banks from taking advantage of the more generous insurance.
FDIC Chair Martin Gruenberg asked staff to undertake an analysis and review of options for reform of the deposit insurance system after the collapse of Silicon Valley Bank and Signature Bank in March, when regulators ended up backstopping all deposits to prevent contagion to the banking system.
US Treasury: 'Decisive actions' taken in response to bank failures
The US Treasury Department said on Monday that authorities took "decisive actions" in response to the failures of First Republic Bank, Silicon Valley Bank and Signature Bank, and remain committed to taking action to ensure that the banking system is safe and depositors feel secure.
"Today, the banking system remains sound and well capitalized, and we have even seen important signs of strength and stabilization across regional banks," Treasury's acting assistant secretary for economic policy, Eric Van Nostrand, said in a statement to the Treasury Borrowing Advisory Committee as the department released new borrowing estimates.