Bank stocks posted more losses Friday, a week after the collapse of SVB Financial put the bank crisis in motion. On Friday, President Biden urged Congress to impose tougher penalties for executives deemed responsible for bank failures.
First Republic Bank tumbled in trading, dragging regional banks down, after suspending its dividend late Thursday. The San Francisco-based outfit received a $30 billion rescue deposit from America's 11 largest banks on Thursday. Meanwhile, SVB Financial, the former parent of Silicon Valley Bank, filed for bankruptcy protection early Friday.
Biden Calls For Tougher Penalties For Bank Mismanagement
On Friday, President Biden urged Congress to pass legislation that would impose harsher penalties for bank executives, holding them accountable for bank failures.
In a White House statement, the President called for Congress to expand the FDIC's authority to claw back executives' compensation at failed banks, including gains from stock sales. The release noted Silicon Valley Bank CEO Gregory Becker sold $3 million in stock the day before the FDIC took control. Specifically, the White House requested clawback authority under the Dodd-Frank Act expand to include a broader set of large banks. Currently, the FDIC has limited ability to recover compensation and gains prior to receivership.
President Biden wants to lower the legal standard for barring executives from working in the banking industry after their firms are placed into FDIC receivership. Currently, the FDIC can only prohibit executives if they engage in "willful or continuing disregard for the safety and soundness of their bank," according to the release.
He also called for Congress to expand FDIC authority to seek fines from negligent executives of failed banks when their actions contribute to the failure of the firm. Under current law, the FDIC can only seek monetary penalties from executives who "recklessly" engage in a pattern of "unsafe or unsound" practices.
"When banks fail because of mismanagement and excessive risk taking, it should be easier for regulators to claw back compensation from executives, to impose civil penalties, and to ban executives from working in the industry again," the White House wrote.
SVB Financial Files For Bankruptcy
SVB Financial voluntarily filed for Chapter 11 bankruptcy protection on Friday and seeks a court-supervised reorganization to preserve its value, the company announced Friday morning. Its venture capital arm, SVB Capital, and SVB Securities, the firm's broker-dealer, were not included in the Chapter 11 filing. SVB will continue supporting its VC and brokerage businesses while it explores strategic alternatives, the company said.
"The Chapter 11 process will allow SVB Financial Group to preserve value as it evaluates strategic alternatives for its prized businesses and assets, especially SVB Capital and SVB Securities," said William Kosturos, Chief Restructuring Officer. "SVB Capital and SVB Securities continue to operate and serve clients."
Santa Clara, Calif.-based SVB Financial is no longer affiliated with Silicon Valley Bank or SVB Private, the bank's private banking and wealth management business. The bank's successor, Silicon Valley Bridge Bank, is operating under the jurisdiction of the FDIC.
The company "believes" it has roughly $2.2 billion in liquidity and SVB Financial says it has "other valuable investment securities accounts and other assets for which it is also exploring strategic alternatives." SVB Financial Group has $3.3 billion in funded debt in the form of unsecure notes. The debt is only relevant to SVB Financial and has no claim against SVB Capital or SVB Securities, the company says. The firm also lists $3.7 billion in outstanding preferred equity.
First Republic Suspends Dividend, Poised For $30 Billion Deposit
Late Thursday, San Francisco-based First Republic suspended its dividend, the bank's board announced. The company says it plans tp focus on reducing borrowings and evaluating the composition and size of its balance sheet. FRC stock fell 33% Friday. Shares bolted 10% higher Thursday afternoon on news of a $30 billion rescue plan to bolster Federal Republic's liquidity.
During the day, JPMorgan, Morgan Stanley and 11 other large banks agreed to deposit $30 billion with First Republic to help stabilize the bank, the group announced Thursday.
Per the plan, Citigroup, Bank of America, Wells Fargo and JPMorgan will each make a $5 billion uninsured deposit to First Republic. Goldman Sachs and Morgan Stanley will both make a $2.5 billion uninsured deposit. And BNY Mellon, U.S. Bancorp, PNC Financial, Truist and State Street will each make an uninsured deposit of $1 billion.
"This action by America's largest banks reflects their confidence in First Republic and in banks of all sizes, and it demonstrates their overall commitment to helping banks serve their customers and communities," the institutions wrote in the joint release.
The plan does not call for a takeover of First Republic.
First Republic Bank stock tumbled more than 31% early Thursday after Bloomberg reported that the San Francisco-based outfit is exploring strategic options to shore up liquidity, including a capital raise and potential sale.
FRC stock is down roughly 82% so far this month as the closures of Silicon Valley Bank and Signature Bank sparked a bank crisis.
First Republic Ratings Downgraded
On Wednesday, ratings agencies S&P Global and Fitch downgraded First Republic, citing liquidity and funding risks. S&P lowered FRC stock to a speculative-grade BB+ from its previous A- rating. Fitch gave First Republic a BB grade, down from A-, and put the bank on negative rating watch. On Monday, Moody's announced it was reviewing First Republic and five other regional banks for potential downgrades.
The news is a dramatic turn for First Republic. On Sunday, it secured additional liquidity from the Federal Reserve Bank and JPMorgan, bringing the total available funding to more than $70 billion. First Republic CEO Jim Herbert told Jim Cramer the bank is operating "business as usual" on Monday. At the time, Herbert noted the bank wasn't seeing many withdrawals of more $250,000, and that the additional funding from JPMorgan is working.
"First Republic's capital and liquidity positions are very strong, and its capital remains well above the regulatory threshold for well-capitalized banks," CEO Jim Herbert said in the funding announcement.
Yellen Denies Bank Crisis
Treasury Secretary Janet Yellen assured Congress that the banking system remains strong during testimony Thursday. In her testimony, Yellen told Congress "that our banking system remains sound, and that Americans can feel confident that their deposits will be there when they need them," according to prepared remarks. Yellen highlighted Federal Reserve and FDIC plans to support the banking system, including the new lending facilities.
Bank Stocks
Regional banks followed First Republic lower Friday, having chased it higher during trading Thursday. Zions Bancorp fell 6.8%, after climbing 4.6% Thursday. Western Alliance dropped 15.5% Friday. Beverly Hills, Calif.-based Pacific West Bank unraveled 19% following the FRC dividend suspension.
JPMorgan slipped 3.8% Friday after climbing nearly 2% Thursday. Wells Fargo retreated 4%, erasing its gains from Thursday. Goldman Sachs shed 3.7% after edging up the day prior.
Credit Suisse American depositary receipts dropped roughly 7% Friday following its $54 billion injection from the Swiss National Bank. Credit Suisse ADRs cratered as much as 30% Wednesday.
You can follow Harrison Miller for more stock news and updates on Twitter @IBD_Harrison
