First Republic Bank is a big mess. That’s due, in large part, to its wealthy clients (Analysis)

() — It may seem surprising that First Republic Bank, a midsize bank targeting wealthy clients in coastal states, has become such a threat to the US banking system that the government has had to step in.

The reason has a lot to do with the high net worth individuals who bank there.

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

San Francisco-based First Republic, which is the 14th-biggest bank in the country, received cash injections from 11 rivals, including the biggest US lenders.

When JPMorgan Chase CEO Jamie Dimon contacted Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell on Thursday, “very quickly the conversation turned to the First Republic,” the company said. source to .

The government-organized bailout is not a bailout: its aim is to give the bank enough cash to meet customer deposit withdrawals and reassure investors that it can withstand the turmoil that has rocked the sector over the past week. .

At the moment, however, it is not having the desired effect.

First Republic shares fell 25% this Friday. Its rescuers are also in trouble, with JPMorgan Chase (JPM) down 3% and Bank of America (BAC) down 4%.

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

Why was the First Republic targeted?

Investors saw similarities between the First Republic and the collapsed Silicon Valley Bank, another midsize lender based in the area of the San Francisco Bay area and a clientele with deep pockets.

“These depositors are especially prone to bankruptcy,” says Patricia McCoy, a Boston College law professor. “They’re sophisticated, they know they have other options, and they have the mechanisms to move money around quickly.”

That “particularly volatile” depositor base poses a risk to investors, said McCoy, who helped create 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 $250,000 FDIC-insured limit in the bank.

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

‘s Matt Egan and Christine Romans contributed reporting.