First Republic Bank Faces Potential Collapse as Shares Plunge and Viability is Questioned
First Republic Bank, the San Francisco-based lender, is facing fresh doubts about its viability and a potential collapse as shares plunged as much as 41% to a record intraday low on Wednesday morning, and were down 18% to $6.68 at 11:58 a.m. They have now declined 95% this year. On Tuesday, the stock of First Republic dropped by almost 50% due to the bank’s weak earnings report from the previous day and disclosure of a significant loss of depositors last month, which severely impacted the bank’s operations. As of Monday’s market close, First Republic’s shares have fallen by over 80% in the current year. The bank is now exploring strategic options, including selling off assets at above-market rates or transferring troubled assets into a “bad bank.” Nonetheless, some banks may hesitate to get involved out of concern for jeopardizing their uninsured deposits and would rather delegate control of a portion of First Republic’s assets to the FDIC.
First Republic ran into financial difficulty shortly after the collapse of Silicon Valley Bank (SVB) and Signature Bank in March, as it had the third-highest share (behind the two collapsed lenders) of uninsured deposits that exceeded the FDIC’s $250,000 limit. First Republic was viewed as a potentially vulnerable bank by investors and customers due to its elevated proportion of deposits that were not insured. This was a concern in the downfall of Silicon Valley Bank. After the collapse of SVB Financial Group, First Republic’s investors began to question the Company’s ability to withstand the interest rate environment and remain solvent.
To make matters worse, First Republic faces the prospect of losing access to the Fed’s lending facilities if a private deal isn’t reached soon. The regulators in the United States favor a private bailout that would not require federal authorities to take over the bank, as doing so could exacerbate the depletion of the FDIC’s insurance fund. The conflicting needs of US officials and the potentially helpful banks have posed a hindrance to finding a solution. The regulators are in favor of a rescue plan that is privately executed, avoiding the acquisition of the bank by the US which would result in a significant loss to the FDIC’s insurance fund amounting to billions of dollars. In order to safeguard their finances, banks are hoping for government intervention in the form of assistance from the FDIC. This assistance would involve the takeover of First Republic’s less desirable assets, but can only occur if the company experiences failure and is put under receivership.
First Republic has been trying to convince at least some of the 11 banks that infused $30 billion of deposits into the bank to provide further support by buying some of First Republic’s assets at above-market rates. The steep decline in deposits came despite the infusion of $30 billion from the larger banks in an attempt to instill confidence and prevent bank runs from spreading. Those purchases would result in losses for the other banks, but First Republic’s advisors are trying to sell the banks on the idea that letting First Republic fail would be even more expensive if it led to still higher regulatory costs and fees.
First Republic faces a tough road ahead, with its stock down 93% in 2023 and the bank exploring strategic options. Two possible solutions being considered are creating a “bad bank” to hold problem assets or selling assets at prices higher than market value. Nonetheless, some banks may hesitate to get involved out of concern for jeopardizing their uninsured deposits and would rather delegate control of a portion of First Republic’s assets to the FDIC. To make matters worse, First Republic faces the prospect of losing access to the Fed’s lending facilities if a private deal isn’t reached soon. However, First Republic is trying to find a way to shift those assets to other banks without taking on a huge loss. One strategy could be to increase the value of the loans by adding equity-based tools such as preferred equity or warrants, which would provide buyers with greater potential for profit.
As part of its earnings release, First Republic announced that it was cutting expenses through reductions in executive compensation, condensing office space, and cutting headcount by 20% to 25% in the second quarter. The bank is now trying to stabilize deposit flows and convince investors of its long-term viability. However, the bank’s high percentage of uninsured deposits, its weak earnings, and the extent of its depositor exodus last month have left it hobbled and on the brink of collapse.
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