First Republic shares fell sharply as Yellen said the Treasury Department would not insure all deposits

NEW YORK (Reuters) – As the beleaguered First Republic weighs its options, Treasury Secretary Janet Yellen said on Wednesday there is no discussion of all-deposit insurance, making the “bullish case” scenario more difficult for it to handle. Inventory.

First Republic, whose shares have lost much of their value since the US banking crisis began on March 8, is among banks talking to peers and investment firms about potential deals in the wake of US regulators’ takeover of Silicon Valley Bank (SIVB). O) and Signature Bank (SBNY.O) this month after bank runs.

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

That hope was dashed on Wednesday, after Yellen told a hearing of the US Senate Appropriations Subcommittee on Financial Services that the government “is not considering insuring all uninsured bank deposits.” She added that the Treasury Department had not considered anything related to asset guarantees.

RJ Grant, head of trading at Keefe, Bruyette & Woods, said the comments affected all regional bank stocks. “Yelen definitely struck a different tone, there was a sense that there were talks behind the scenes in Washington that depositors would be protected.”

JPMorgan (JPM.N) CEO Jamie Dimon is scheduled to meet with Lyle Brainard, director of the White House National Economic Council, during the planned trip to Washington, according to a person familiar with the situation. The meeting has been scheduled in advance and Reuters was unable to say what is on the agenda. It comes as First Republic Bank’s efforts to secure an infusion of capital continued on Wednesday.

A Morgan Stanley report considered that a possible extension of the FDIC lockout could bring back the majority of First Republic customers. Banks involved in First Republic bailout negotiations are asking for a loss-sharing arrangement with the US government similar to the terms agreed to by UBS Group (UBSG.S) in its emergency takeover of rival Credit Suisse, according to an industry source.

The source, who asked not to be identified to reveal private conversations, added that the buyer will be supported if, after the First Republic purchase, it finds a bigger loss than expected.

First Republic declined to comment.

Reuters reported, citing three people familiar with the matter, that the bank is looking at ways to reduce its size if attempts to raise new capital fail.

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

Morgan Stanley analysts have estimated that a potential buyer would need to absorb $26.8 billion in market losses from First Republic’s loan and securities portfolios, while an additional $9.5 billion would be needed to recapitalize the bank.

Morgan Stanley analysts estimated that in a worst-case scenario, First Republic shares would drop to just $1.

Citigroup withdrew its assessment of First Republic on Tuesday and put the stock under review. “Some form of government intervention seems increasingly likely, though in what form it remains unclear,” analysts Arin Ciganovich and Kylie Wang said in a report.

(This story has been corrected to say the $54 price target is only for the best case scenario in paragraph 3)

Additional reporting by Tatiana Pautzer and Chris Prentice in New York Additional reporting by Sinead Caro in New York Editing by Lanan Nguyen, Nick Zieminski and Matthew Lewis

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