How the First Republic became such a hot mess

New York (CNN) It may seem surprising that First Republic, a mid-sized bank serving wealthy clients in coastal states, became such a danger to the US banking system that the government had to nudge the industry to stage an intervention.

The reason has a lot to do with the wealthy people who bank there.

“It’s the biggest example of a bank that could fail and shouldn’t fail — a prime bank,” said a source close to the 48-hour deal to inject $30 billion in cash into First Republic.

San Francisco-based First Republic, the 14th largest bank in the country, received the cash infusion from 11 rivals, including America’s biggest lenders.

When JPMorgan Chase CEO Jamie Dimon reached out to Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell on Thursday, “Very quickly the conversation turned to First Republic,” the source told CNN.

The government-sponsored rescue is not a bailout – its aim is to give the bank enough cash to meet customer withdrawals and reassure investors that it can weather the turbulence that has rocked the industry in the past week.

So far, it is not having the desired effect.

First Republic stock fell 25% on Friday. Its rescuers also struggle along JPMorgan Chase (JPM) down 3% and Bank of America (BAC) falling 4 per cent

“The market is saying, ‘This is still not enough. We need more,'” Ed Mills, Washington policy analyst at Raymond James, told CNN on Friday.

Why did the First Republic have a target on its back?

Investors saw similarities between First Republic and failed Silicon Valley Bank — another mid-sized Bay Area-based lender with a deep customer base.

“These depositors are particularly vulnerable,” said Patricia McCoy, a law professor at Boston College. “They are sophisticated, they know they have other options and they have mechanisms in place to move money quickly.”

That “particularly volatile” base of depositors poses a risk to investors, said McCoy, who helped establish the Consumer Financial Protection Bureau.

Big banks like JPMorgan Chase have diversified their depositor bases to include more of what McCoy calls “sticky deposits.” In other words, regular people who have less than the FDIC-insured limit of $250,000 in the bank.

About two-thirds of First Republic’s deposits were uninsured. That’s far less than the 94% uninsured that Silicon Valley Bank had, but First Republic also had an unusually high 111% loan-to-deposit ratio at the end of last year, according to S&P Global — meaning it’s been lending more money than it has in deposits.

— CNN’s Matt Egan and Christine Romans contributed reporting.

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