Janet Yellen's Remarks See First Republic's Stock Tumbling

Treasury Secretary Janet Yellen testifies about the Biden administration's FY2024 federal budget proposal before the Senate Finance Committee in the Dirksen Senate Office Building on Capitol Hill on March 16, 2023. (Chip Somodevilla/Getty Images)

First Republic Bank, which has suffered significant losses since the onset of the banking crisis on March 8, saw its stock tank by 15 percent due to market concerns about the fate of the bank’s deposits. The chances of a full deposit insurance program being introduced by the Federal Deposit Insurance Corp. (FDIC) still hang in the balance, as confirmed by Treasury Secretary Janet Yellen on March 22 during a hearing of the U.S. Senate's Appropriations Subcommittee on Financial Services.

The secretary sent mixed signals to the market, refusing to commit to a blanket bailout while supporting legislative efforts to extend deposit insurance beyond $250,000 per account.

At one point during the hearing, Yellen said the government "is not considering insuring all uninsured bank deposits" and that the Treasury Department hasn't considered any guarantees for assets.

Replying to a suggestion from Sen. Joe Manchin (D-W.Va.) that Congress should pass a law that enables depositors to pay a fee in exchange for an increased insurance cap, she said such an endeavor would be “very worthwhile.”

Yellen also reiterated previous remarks that the Treasury is ready to backstop losses that represent a systemic risk to the financial system.

Fed Chair Jerome Powell also spoke on March 22 after announcing the committee’s decision to raise its key interest rate by 25 basis points.

Powell addressed the strenuous banking situation at the top of his speech but noted that the Federal Reserve is focused on bringing inflation to 2 percent. 

U.S. Federal Reserve Board Chair Jerome Powell speaks during a press conference in Washington on Feb. 1, 2023. (Saul Loeb/AFP via Getty Images)

“The choice to start the presser with a discussion of the banking system has a clear policy message: the mini-banking crisis is the most important thing in the Fed's thinking right now,” Guy Lebas, Janney Montgomery Scott's chief fixed income strategist, wrote on Twitter. “Second is the focus on the labor markets, which policymakers still seem to view as too tight."

In the wake of U.S. regulators taking over Silicon Valley Bank (SVB) and Signature Bank this month following bank runs, banks such as First Republic are searching for ways to secure capital.

The exterior of a First Republic Bank branch is seen on Barclay Street in New York on March 13, 2023. (Michael M. Santiago/Getty Images)

If a buyer acquires First Republic, it must absorb losses of $26.8 billion in mark-to-market from its loan and securities portfolios, with an additional $9.5 billion required to recapitalize the bank.

First Republic’s stock cloaked the day at $13.26 per share, claiming about 3 percent in after-hours trading. Some Morgan Stanley analysts have put a share-price target of $1 for the beleaguered bank’s stock.

Even if the bank’s deposits were fully insured, it remains unclear whether the market would find solace in such an announcement. SVB shareholders weren't included in the previous FDIC bailout, a precedent that gives First Republic shares a less-than-desirable risk profile.