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US efforts continue to rescue First Republic – Industry roundup: 27 April

US lender First Republic back in the spotlight

Efforts are continuing in the US to prevent further banking sector volatility by securing the future of San Francisco-based First Republic Bank, trading in whose shares was suspended several times on Wednesday. They ended US$2.42 lower on the day at US$5.68 on Wall Street and have fallen by around 95% since the start of the year. Earlier this week the bank reported net deposit outflows of US$72 billion over the first quarter of 2023, despite support from 11 of the biggest lenders in the US.

First Republic has announced that it is pursuing “strategic options” to shore up its business, but analysts are sceptical about the chances of a sale emerging.

According to a CNBC report, the White House, the Federal Reserve and the US Treasury are evaluating plans to rescue First Republic under an "open bank" rescue.

One scenario being considered is to create a special purpose entity, with the banks that supported First Republic last month with US$30 billion in deposits, to purchase the bank's “underwater” loans on its balance sheet above where they would be marked, according to CNBC’s David Faber, who cited people familiar with the discussions. If this occurs, First Republic may go out and raise new equity.

First Republic has faced increased withdrawals after the failures of three US regional banks, Silicon Valley, Silvergate and Signature in March.

The bank is also thought to be considering divesting US$50 billion to US$100 billion of long-dated securities and mortgages as part of a larger restructuring plan. Any sales would help address the First Republic’s asset-liability mismatch. This could see it offer warrants or preferred equity as an incentive to buy assets above their market value.

The bank is attempting to strengthen its balance sheet to avert a takeover by regulators and to allow for a possible capital raise. It has been working on cutting costs, with plans to reduce its workforce by 20%-25% in Q2 and condense corporate office space. First Republic, which has been struggling with customers moving business away from the bank.

Eugenio Catone, a financial blogger for Seeking Alpha, commented that in just three months, First Republic’s deposit structure has completely changed. “Despite continued Fed support, I don’t see how FRC can recover. Even if it does, to believe that the stock price will return close to the levels of three months ago is totally misplaced,” he warned. Investing Group leader Stone Fox Capital believes First Republic’s stock won't rally until the bank's flawed business model is fixed.

In its own commentary on the bank’s problems, The Economist magazine notes: “At the end of 2022 First Republic held US$213 billion in assets, of which about US$16 7 billion were in loans and US$32 billion in bonds. It was funded by US$176 billion in deposits, US $7billion in short-term funding and US$9 billion in long-term funding. The bank also had US$18 billion in high-quality capital. By the end of the first quarter the firm had lost US$102 billion of its original deposits.

“This has been replaced by a vast amount of short-term borrowing, which climbed to US$80 billion by the end of the first quarter, and by US$30 billion of pity deposits from six big banks, which placed money with the institution to throw it a lifeline.”

According to David Wagner, portfolio manager at Aptus Capital Advisors, First Republic’s assets “will be sold, but it may take some time and they could be sold at a pretty severe discount to par.”

Yuan surpasses dollar as China’s most used cross-border currency

China passed another milestone last month in its bid to reduce reliance on the US dollar, as yuan (CNY) usage in its cross-border transactions surpassed that of the greenback’s for the first time.

In March, the local currency’s share of China’s cross-border payments and receipts rose to a record high of 48% at the month end and has grown steadily from nearly zero in 2010, according to research by Bloomberg Intelligence citing data from the State Administration of Foreign Exchange (SAFE). The dollar’s share declined to 47% from 83% over the same period, the figures showed.

Reflecting efforts by Beijing to internationalise use of the currency, CNY cross-border payments and receipts rose to a record US$549.9 billion in March from US$434.5 billion a month earlier. It was used in 48.4% of all cross-border transactions, Reuters calculated, while the dollar’s share dipped to 46.7% from 48.6% a month earlier.

The volume of cross-border transactions covers both the current and capital accounts.

China has long been promoting the use of CNY to settle cross-border trades as part of an efforts to internationalise the use of its currency, but the CNY’s use in global trade finance remains low, although it has shown steady increases.

Data from SWIFT showed that the CNY’s share of global currency transactions for trade finance rose to 4.5% in March, while the dollar accounted for 83.71%.

Visa makes plans for “ambitious” crypto product

Global payments giant Visa has revealed that it continues to explore the benefits of the cryptocurrency industry with a new initiative focused on stablecoin payments.

On April 24 Cuy Sheffield, head of crypto at Visa, used Twitter to announce a new cryptocurrency-related project developed by the group.

“We have an ambitious crypto product roadmap and just opened a few regs for senior software engineers to help us drive mainstream adoption of public blockchain networks and stablecoin payments,” he Tweeted.

According to a Visa job posting published on April 20, the group’s crypto division is building the “next generation of products” to facilitate the digital commerce of everyday life. To develop the product, Visa is seeking to hire software engineers focused on programming, backend systems Web3 technologies.

“Particularly interested in experience using Github Copilot and other artificial intelligence (AI) assisted engineering tools to write and debug smart contracts,” Sheffield wrote on Twitter.

Among preferred applicant qualifications, Visa listed a good understanding of layer 1 and layer 2 solutions alongside experience with writing smart contracts using the programming language Solidity. Introduced specifically for the Ethereum network, Solidity is used to create smart contracts on blockchain platforms and generate a chain of transaction records in the blockchain system.

The position also requires good understanding of public and permissioned distributed ledger networks, security protocols, private key custody as well as new Ethereum enhancements such as ERC-1337 introduced in September 2021, an “account abstraction proposal which completely avoids consensus layer protocol changes, instead relying on higher-layer infrastructure.”

Visa made a major move into the crypto industry in 2020 when it partnered with the blockchain firm Circle (see below) to support the USD Coin stablecoin on certain credit cards. The group has been gradually expanding its crypto offering but put some new industry partnerships on hold in 2022 in response to the crypto bear market and major industry collapses such as Celsius and FTX.

Volante Technologies paper predicts CBDCs to lead the payments industry

Cloud payments and financial messaging specialist Volante Technologies has released a partner-authored paper offering insights into the banking sector and projections for innovation-driven growth.

Planning for the Next Decade is the first in an annual series of reports, and incorporates contributions from 15 global software integrators, vendors, and consultancies. It highlights industry trends such as central bank digital currencies (CBDCs), distributed ledgers, real-time payments, and investment in artificial intelligence (AI) and machine learning.

According to Volante’s strategic partners, CBDCs will dominate the payments sector within the next few years, prompting banks to adopt distributed ledger technology (DLT)-aware payment solutions. Additionally, banks are expected to adopt a data-driven approach to improve customer insight and develop better products, leveraging AI and machine learning enabled by cloud and Payments as a Service (PaaS).

The authors also emphasise the importance of innovation and technologies that accelerate the modernisation of banking infrastructure, particularly in payments. Approximately 90% of the data received by banks today and 75% of ISO 20022 commercialisation use cases are related to customer payment data. The report also examines the global move towards the ISO 20022 standard in payments, highlighting how banks can exploit the richer data to differentiate themselves in the market.

“This report showcases our belief that a global partner ecosystem harnesses the power of collective wisdom and best ideas, enabling financial businesses to achieve new levels of success and business impact. The contributors of this report alone represent over 350 years of experience,” said Jim Chow, VP Partnerships, Volante Technologies.

The paper draws on the contributions of partners from the US, Europe, and the Middle East, including Accenture, AWS, Capgemini, Cornerstone Advisors, Delta Capita, HCLTech, KPMG, Mambu, MDSL, Microsoft, Persistent Systems, PwC, Q2, Red Hat, and Salesforce.

US companies opting for debt restructure over bankruptcy

More US companies are resorting to debt restructurings to avoid expensive bankruptcy proceedings, but many borrowers ultimately end up in court anyway reports the Financial Times — with their deals amounting to little more than “can-kicking” exercises.

The paper cites a recent report by ratings agency Moody’s that finds nearly three in four US corporate debt defaults in 2022 were out-of-court “distressed exchanges”, where a company offers creditors assets worth less than their original bonds or loans, according. That is up from roughly half in 2020, the agency said.

Moody’s predicts that far-reaching private equity ownership of companies with very weak ratings will further fuel the growth of distressed exchanges as this type of restructuring can protect such backers’ investments.

“Private equity sponsors heavily favour distressed exchanges as a debt restructuring tool of choice because it helps them sidestep bankruptcy and preserves their equity,” the report noted.

However, many businesses default again following such restructurings. The “re-default” rate monitored by Moody’s currently stands at 47%.

Sinjin Bowron, head of high-yield and leveraged loans at Beach Point Capital Management, told the FT that some companies are “just kicking the can” with distressed exchanges and merely delaying an inevitable bankruptcy.

USDC issuer Circle expands cross-chain capabilities

Boston, Massachusetts-based Circle Internet Financial, issuer of the USD Coin (USDC), has released a new method to move the major stablecoin between blockchains that it says is faster, safer and cheaper than the “bridges” that are widely used in decentralised finance.

Called the “Cross-Chain Transfer Protocol,” or CCTP, the technology will be used initially for USDC transfers between the Ethereum and Avalanche blockchains, with more chains to be added over the second half of 2023. DeFi apps can integrate relevant smart contracts to make it easy for users to move their stablecoins.

The technology attempts to break down the barriers now fragmenting USDC’s US$30 billion market cap across many different blockchains. Although Circle issues “native” USDC on many top networks, including Ethereum and Avalanche, those asset tranches were more or less partitioned; those who wanted to "bridge" the divide had to engage in complicated and sometimes expensive cross-chain transfers.

Circle’s new method seeks to replace bridges, which solved that problem by creating another asset, a derivative token called a wrapped asset. CCTP works by destroying USDC on the source chain and recreating it on the destination chain.

The process could pay the biggest dividends when it comes to asset swaps, where it could be used to move cross-chain and cross-token transfers behind the scenes.

“With CCTP, developers can simplify the user experience and their users can trust that they are always transacting with a highly liquid, safe and fungible asset in native USDC. This milestone makes USDC a natively multi-chain digital dollar,” Joao Reginatto, vice president of product, said in a press release.

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