By AJ Fabino

Growing concerns about the safety of bank deposits have prompted investors to approach community and regional banks with caution.

Recent events, such as the collapse of Signature Bank and SVB Financial Group’s Silicon Valley Bank have raised questions about deposit insurance, prompting U.S. Treasury Secretary Janet Yellen to testify before a U.S. Senate appropriations subcommittee.

U.S. Secretary of the Treasury Janet Yellen testifies during a House Appropriations Subcommittee hearing at Rayburn House Office Building on Capitol Hill March 23, 2023, in Washington, DC. Yellen had approached the idea to The Federal Reserve using bank money to bail out First Republic Bank. SHA HANTING/BENZINGA

Yellen said Wednesday the FDIC was not considering providing “blanket insurance” for banking deposits.

The collapse of Silicon Valley Bank, in particular, led to a widespread investor sell-off in many community and regional banks, including First Republic Bank.

“I think you’re able to rely on it,” said Larry Blankfein, former CEO of Goldman Sachs, on Fareed Zakaria GPS on CNN. “But there is a tail risk in that lack of absolute certainty.”

First Republic shares saw heightened volatility following Yellen’s comments, and the situation isn’t over just yet for the stock.

The company’s tangible book value is currently far underwater, leaving a capital gap of up to $13.5 billion, according to Bloomberg, which cited Wedbush analysts.

Although a government-aided deal could potentially save the bank, it is unlikely to benefit stockholders. Wedbush analysts are unable to find a realistic scenario where there is residual value for First Republic common shareholders.

“I don’t think people should panic, but it’s just prudent to have insured deposits versus uninsured deposits,” said Jay Hatfield, CEO at Infrastructure Capital Advisors and portfolio manager of the InfraCap Equity Income ETF.

If First Republic’s holdings were valued at current market prices, its tangible book value would be negative $73 per share, which means an acquirer would have to deal with a “$13.5 billion capital hole.”

Yellen came up with the idea of using bank fund to rescue First Republic Bank with injecting a government bailout. 

The recent injection of $30 billion in deposits from 11 of the largest U.S. banks was only a short-term solution, and a recapitalization of the bank would result in heavy dilution for current holders of common stock.

JPMorgan Chase & Co CEO Jamie Dimon and Citigroup CEO Jane Fraser talk as they arrive for a Senate Banking, Housing, and Urban Affairs Committee hearing on Capitol Hill September 22, 2022 in Washington, DC. The committee held the hearing for annual oversight of the nation’s largest banks. DREW ANGERER/BEZINGA

This was an attempt to avoid the mistake from the 2008 financial crisis that involved government bail out and not involving any taxpayer money to the banks. CEO bonuses were involved during the bailout at the time.

Unfortunately, the government’s involvement in bank collapses has not been favorable for shareholders or unsecured-debt holders.

“The Council discussed current conditions in the banking sector and noted that while some institutions have come under stress, the U.S. banking system remains sound and resilient,” the Treasury said in a statement.

Biden stated earlier in the month the banking system is safe and assure after the collapse of Silicon Valley Bank and Signature bank.

“If we find that there’s more instability than appears, we’d be in a position to have the FDIC use the power it has to guarantee those (deposits) above $250,000 like they did already,” Biden said in a statement while meeting with Canadian Prime Minister Justin Trudeau in Ottowa, Canada.

Some bankers and analysts have blamed the repeal of the Dodd-Frank Act that regulated the banking industry 2 years after the 2008 financial crisis.

Yellen made it clear that they are not protected in the event of a takeover. That lack of protection led to bonds issued by First Republic trading at deeply distressed levels. As of Wednesday, its 4.375% subordinated bonds with a 2046 maturity were quoted at 62.5 cents on the dollar.

Produced in association with Benzinga

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