The stock market has been extremely concerned about the state of the banking system, with several banks already having failed and others seemingly under pressure. So it came as little surprise that when a plan to provide ailing First Republic Bank (FRCB) with a massive infusion of deposits got announced, the reaction in major stock market indexes was positive. The Nasdaq Composite (^IXIC 1.58%) was once again the big winner, but the rises in the Dow Jones Industrial Average (^DJI 0.32%) and S&P 500 (^GSPC 1.08%) weren't too shabby.


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Data source: Yahoo! Finance.

One interesting thing about the rally was that the stock at the center of the rescue effort wasn't able to sustain its gains. Although First Republic shares were up 10% in the regular trading session on Thursday, the bank stock  plunged 22% in after-hours trading as of 6 p.m. ET. The move lower reflected just how many problems First Republic is having and confirmed the need for the historic infusion of cash from some of the biggest financial institutions in the nation.

Big banks shore up First Republic

The announcement regarding First Republic came in a joint release  from some of the biggest banking institutions in the U.S. market. Bank of America (BAC -1.40%), Citigroup (C -0.98%), JPMorgan Chase (JPM 0.24%), and Wells Fargo (WFC -0.15%) are each making a $5 billion uninsured deposit into First Republic. Goldman Sachs (GS 0.43%) and Morgan Stanley (MS 0.34%) subscribed at the silver-tier level, depositing $2.5 billion each. Bank of New York Mellon (BK 1.67%), PNC Financial Services (PNC 0.93%), State Street (STT -0.58%), Truist Financial (TFC 3.23%), and U.S. Bancorp (USB 0.63%) participated with deposits of $1 billion each. In total, that adds up to $30 billion from the 11 financial institutions.

Customer at a bank in front of a bank teller.

Image source: Getty Images.

The intent of the joint effort was to express all 11 banks' confidence in the strength of the banking system. As the banks see it, nothing about the recent bank failures has changed the fact that there is plenty of liquidity in the banking system, with strong capital levels and profitability. Credit is readily available, and these large banks wanted to stand united with their smaller counterparts because of the vital role that small and mid-sized banks play in supporting local communities and businesses.

So why did First Republic shares fall?

The move from major banks to make deposits into First Republic might have seemed like unequivocally good news. However, the filing that First Republic made with the U.S. Securities and Exchange  Commission acknowledging the deposits gave more information about the bank's financial condition, and that seemed to give shareholders some pause about First Republic's prospects going forward.

First Republic founder Jim Herbert and CEO Mike Roffler expressed their appreciation for all 11 banks, noting that the collective effort strengthened First Republic's liquidity position. The two executives appreciated the vote of confidence.

The filing went on to note that as of March 15, First Republic had $34 billion in cash, an amount that doesn't include the new deposits from big U.S. banks. However, from March 10 to March 15, First Republic borrowed anywhere from $20 billion to $109 billion from the Federal Reserve, paying prevailing overnight lending rates of 4.75%. In addition, the bank had to boost its short-term borrowings from the Federal Home Loan Bank by $10 billion at an even higher rate of 5.09%. In light of its financial stress, the First Republic board chose to suspend the stock's dividend.

Going forward, First Republic will have to regain confidence in order to keep regular depositors at the bank. If ordinary customers don't believe in First Republic, even the nation's largest banks won't be able to keep their counterpart afloat. Conversely, though, if bank customers stick with First Republic, then the infusion will have served its purpose.