The Potential Collapse of First Republic Bank: A Look at the Loss of Customer Deposits and its Implications for the Banking Industry
First Republic Bank, a San Francisco-based lender, is facing a potential collapse as it loses large amounts of customer deposits. The bank lost over $100 billion of customer deposits in the first quarter of 2023, which amounts to 41% of its total deposits from the previous year. This has left First Republic Bank with $55 billion of insured deposits, $20 billion of uninsured deposits, and $30 billion of term deposits from other large banks. The bank has a ratio of 111% for loans and long-term investments to deposits, meaning it has loaned and invested more money than it has in deposits, which exposes it to liquidity risk.
First Republic Bank, like Silicon Valley Bank and Signature, had a large percentage of uninsured deposits, which made it susceptible to deposit flight. The bank had seen deposits boom during the low-rate pandemic era, but it has also been sitting on large unrealized losses due to the drop in the value of the bonds it has marked as being held-to-maturity as rates have gone up.
The collapse of Silicon Valley Bank triggered a flight from several large regional banks, which led to the loss of deposits for First Republic Bank. The bank’s stock has plunged since its earnings announcement on Tuesday, showing a loss of $100 billion in deposits in just one month. Before this announcement, the bank’s stock was already down more than 80% since the US regional bank crisis began. Since early March, investors are down 90%.
First Republic Bank is likely in its last day as a going concern, and its continuing fall will worry regulators as they often see a strong correlation between share-price falls and depositors fleeing. The steep decline in deposits came despite a group of 11 larger banks infusing $30 billion of deposits into First Republic Bank in an attempt to instil confidence and prevent bank runs from spreading. Advisors to First Republic Bank are trying to convince some of those banks to provide further support by buying some of First Republic’s assets at above-market rates.
If First Republic Bank fails, the Federal Deposit Insurance Corporation (FDIC) will likely want to avoid systemic risk and offer insurance to all depositors, even those without insurance. This will cost a significant amount and will be funded mostly by large banks, costing them tens of billions of dollars. That’s on top of $30 billion in bailouts led by JPMorgan Chase last month. Earlier in March, JPMorgan also extended a $70 billion line of credit to First Republic Bank.
While those purchases would result in losses for the other banks, First Republic Bank’s advisors are trying to sell the banks on the idea that letting the bank fail would be even more expensive if it led to higher regulatory costs and fees. First Republic Bank’s troubles have been brewing for some time, and its collapse could have severe consequences for the banking industry.
0. “Here’s what we know about First Republic Bank” CNN, 27 Apr. 2023, https://www.cnn.com/2023/04/27/investing/premarket-stocks-trading/index.html
1. “First Republic Bank shows how not to bolster confidence” Moneycontrol, 27 Apr. 2023, https://www.moneycontrol.com/news/opinion/first-republic-bank-shows-how-not-to-bolster-confidence-10484391.html
2. “How First Republic Bank’s strategy of low-rate mortgages backfired” Business Insider, 25 Apr. 2023, https://www.businessinsider.com/why-first-republic-bank-in-trouble-mortgages-backfired-rising-rates-2023-4
3. “Pre-Farewell to First Republic” The American Prospect, 28 Apr. 2023, https://prospect.org/economy/2023-04-28-pre-farewell-first-republic/
4. “First Republic’s dramatic slide continues, stock falls nearly 30% as bank looks for rescue deal” CNBC, 26 Apr. 2023, https://www.cnbc.com/2023/04/26/first-republic-continues-dramatic-slide-as-it-searches-for-rescue-deal.html
5. “First Republic may not survive, even after two multibillion-dollar bailouts” CNN, 26 Apr. 2023, https://www.cnn.com/2023/04/26/investing/first-republic-bank-survival-options/index.html