Washington turns to Wall Street to help rescue dying banking sector

Washington: The scene was reminiscent of the last financial crisis, nearly 15 years ago: Faced with a blossoming emergency in the banking sector, worried regulators and policymakers in Washington turned to Wall Street for help.

The anxiety this week centred on First Republic Bank in San Francisco, which was once the envy of the banking sector, with its wealthy and well-travelled clientele. Now the bank was reeling after some of those customers withdrew billions of dollars.

As early as Tuesday, it became clear to policymakers that the First Republic needed to be rescued or it could fail, two people briefed on the matter told The Associated Press, speaking anonymously because they were not authorized to discuss details.

The result was a swift agreement among the nation’s leading banks to lay aside competitive instincts to come to First Republic’s aid. With Washington greasing the wheels, a coalition of lenders put $30 billion in uninsured deposits into the California-based bank as a show of support.

The money gives First Republic a lifeline while it reportedly seeks a buyer. Regulators hope it also bolsters confidence in the health of the broader banking system.

The recent turmoil in the banking industry isn’t on par with the crisis that sparked the Great Recession from 2007 to 2009. But after Silicon Valley Bank and Signature Bank failed and were seized by the federal government, the industry’s overseers worried about more dominoes falling.

Treasury Secretary Janet Yellen discussed the idea of supporting First Republic with other bank regulators the Federal Reserve, the Federal Deposit Insurance Corp. and the Comptroller of the Currency. Together they concluded that some sort of private rescue package was needed to prevent the crisis from worsening.

Among the first calls made by Yellen and other policymakers was to Jamie Dimon, the chairman and CEO of JPMorgan Chase & Co. There may have been a sense of d j vu: Back in 2008, Dimon was the go-to banker for Washington to find private solutions for that banking crisis.

“We have our marching orders,” Dimon reportedly said after the call with Yellen. He then proceeded to build a coalition of banks willing to place deposits with First Republic.

This rescue would be simply compared with the 2008 crisis. First Republic needed money to replace any deposits that were being pulled out. The Wall Street banks have been flush for years, and deposits are one of the cheapest forms of capital a bank can get.

It was clear First Republic was struggling with short-term fears. Between March 10 and Wednesday, the bank borrowed $109 billion from the Federal Reserve’s so-called “discount window,” a mechanism that allows banks to get 90-day loans using high-quality bonds as collateral. The window is often used in times of crisis.

First Republic wasn’t alone. As of Wednesday, the Fed had loaned $153 billion through the window, more than during the 2008 financial crisis.

A spokesman for First Republic did not respond to requests for comment on the package or the bank’s financial health.

Such rescues are intended to protect the system against further bank runs.