The Royal Bank of Canada moved to prop up City National Bank on Friday as its Los Angeles-based subsidiary continues to struggle under the weight of the U.S. regional banking crisis.
RBC said it injected a portion of the American bank's debt holdings into City National and transferred some of the American bank's debt holdings to the Canadian parent. The objective of those transactions, RBC said, is to stabilize City National's balance sheet and improve its profit margins after the U.S. bank posted a US$38-million net loss in its most recent quarter.
The lifeline of RBC could be considered an 'internal bailout' and it should help maintain City National's operations for the time being done, Rizvanovic said. But he emphasised that the transfer of cash and assets to RBC would only be temporary solutions.
Rizvanovic said he would not comment on the decision, saying that he had no idea what was going on at the time.
The collapse of Silicon Valley Bank, Signature Bank and First Republic Bank earlier this year highlighted the risks facing medium-sized U.S. banks in a higher interest-rate environment. Low-interest loans and bonds are the main components of many of their assets. The University of Northwestern University's Kellogg School of Management estimates that up to 186 U.S. regional banks are at risk of insolvency due to the declining value of their assets, which raises the chances of depositors withdrawing their holdings en masse in a bank run.
City National has tripled its total assets to US$96.1 billion from US$32 billion as of July 31, 2023, compared to US$32 billion as of July 31, 2023. However, it has also faced increasing scrutiny.
In January, the Justice Department of the U.S. Justice Department fined City National for discriminating against predominately Black and Latino communities in its mortgage underwriting business. The fine represents the largest-ever penalty instituted in relation to a practice called'redlining', which involves companies drawing symbolic red lines on maps of communities where they refuse to provide services 'because of race, colour or national origin of the residents of those communities, according to a Justice Department definition.
RBC chief executive officer Dave McKay tried to pro-actively address concerns about City National's balance sheet during an Aug. 24 conference call with analysts held to discuss his bank's third-quarter results.
In his prepared remarks, Mr. McKay said that a higher cost of doing business is reducing the profitability for U.S. regional banks.
Two weeks later, at the Scotiabank Financials summit, Mr. McKay struck a more optimistic tone.
He said: 'D have a record year in City National this year, and everything got turned upside down. ll see it begin to stabilize in Q4 and improve next year, and we still see enormous opportunity for the City National franchise.