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First Republic shares fall as Yellen says not considering 'blanket insurance' on bank deposits

First Republic shares fall as Yellen says not considering 'blanket insurance' on bank deposits

A "bull case" scenario for the shares of beleaguered First Republic Bank (FRC.N) as it considers its options became more difficult on Wednesday after Treasury Secretary Janet Yellen said there is no discussion on insurance for all bank deposits without approval from the U.S. Congress.
First Republic, whose shares have lost much of their value since the banking crisis started in the U.S. on March 8, is among banks speaking to peers and investment firms about potential deals in the wake of U.S. regulators' taking over Silicon Valley Bank (SIVB.O) and Signature Bank (SBNY.O) following bank runs.

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

That hope was reduced on Wednesday, after Yellen told a hearing of the U.S. Senate's Appropriations Subcommittee on Financial Services that she was not considering such a move without congressional approval and was reviewing bank risks on a case-by-case basis.

"I have not considered or discussed anything having to do with blanket insurance or guarantees of deposits," she said.

On Tuesday, she said the Treasury and regulators had a "resolute commitment" to safeguard deposits of smaller institutions, including community banks.

Her latest remarks affected all regional bank stocks, said R.J. Grant, head of trading at Keefe, Bruyette & Woods.

"Yellen struck a different tone for sure. There was this feeling that there was behind-the-scenes talks in Washington that depositors would be protected," Grant said.

JPMorgan (JPM.N) Chief Executive Jamie Dimon met with Lael Brainard, director of the White House's National Economic Council, on Wednesday during a planned trip to Washington, according to a person familiar with the situation. The meeting agenda was unclear. It came as First Republic's efforts to secure a capital infusion continued.

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

The acquirer would receive support if after buying First Republic it finds a larger loss than expected, added the source, who requested anonymity to disclose private conversations.

First Republic declined to comment.

The bank is looking at ways it can downsize if attempts to raise new capital fail, Reuters reported on Tuesday, citing three people familiar with the matter.

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

A potential buyer would need to absorb $26.8 billion in mark-to-market losses from First Republic's loan and securities portfolios, while an extra $9.5 billion is needed to recapitalize the bank, the Morgan Stanley analysts estimated.

In the worst-case scenario, First Republic's shares would sink to just $1, Morgan Stanley analysts estimated.

Citigroup withdrew its estimates for First Republic on Tuesday and put the stock under review. Analysts Arren Cyganovich and Kaili Wang said in a report that "some form of government intervention seems increasingly likely, albeit in what form remains unclear."
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