US considers emergency credit expansion, First Republic in the spotlight

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Key takeaways:

  • Despite banking laws requiring that remedies not be meant to benefit a specific bank, this change could be set up to ensure First Republic benefits.
  • The First Republic is working to strengthen its balance sheet in the interim.

People who know the matter claim that US authorities are considering “expanding” an emergency credit limit for banks, which might give First Republic Bank some breathing room to handle balance sheet issues.

Bloomberg reported on March 26 that American officials are considering how they can help the First Republic. The report states that one of the alternatives under consideration is “expanding the Federal Reserve’s offering to the First Republic.”

Since the First Republic is working to strengthen its balance sheet in the interim, regulators allegedly determined that the company is “stable enough to operate” without the need for immediate intervention.

The sources reportedly stated that although the Fed’s liquidity offerings would be increased in accordance with banking laws, which require that it be “broadly based” and not intended to benefit a particular bank, they also issued a warning that the change could be “made in a way” that makes certain First Republic Bank advantages.

First Republic’s deposits are stabilizing, and the bank is not in danger of suffering the kind of sudden, severe run that prompted regulators to shut down Silicon Valley Bank, according to reports, despite First Republic having structural issues with its balance sheet. Recent reports stated:

“It has cash to meet client needs while it explores solutions, the people said. That includes $30 billion deposited by the nation’s largest banks this month.”

Announcing this initiative follows the Fed’s announcement on March 19 of a plan to improve liquidity conditions through the use of a “swap line,” which involves an agreement between two central banks to trade currencies, as a strategy to improve liquidity conditions. The Federal Reserve stated in a press release that:

“To improve the swap lines’ effectiveness in providing US dollar funding, the central banks currently offering US dollar operations have agreed to increase the frequency of seven-day maturity operations from weekly to daily,”

This exchange line network, comprised of the Canadian Reserve Bank, the British Reserve Bank, the Bank of Japan, the European Central Bank, and the Swiss International Bank, was launched on March 20 and is scheduled to continue until at least April 30.

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