First Republic Bank has become the second large regional bank in the United States with assets of more than $200 billion to fail in a span of a few weeks. Like Silicon Valley Bank, which was seized by the government on March 10, First Republic catered to a wealthy clientele, which helped rapidly increase deposits but could also have contributed to its downfall. The bank’s business model left it susceptible to a sudden increase in interest rates.
Ever since the collapse of Silicon Valley Bank—and Signature Bank the same weekend—investors have wondered what would be next. First Republic quickly rose to the top of that list, but investors and analysts were worried about banks like Comerica and KeyCorp, which also had large numbers of accounts with deposits above $250,000, the level insured by the federal government.
Here are some things to know about First Republic Bank bankruptcy.
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WHY DID THE FIRST REPUBLIC BANK FAIL? First Republic grew rapidly thanks to deposits from wealthy individuals and companies. It used those deposits to make large loans, including huge mortgages, when interest rates were at record lows in the hopes of convincing clients to use more profitable products like wealth management.
Many of the bank’s accounts had deposits well in excess of the $250,000 that the federal government insures. When Silicon Valley Bank failed, customers withdrew their money, fearing their deposits were in jeopardy. First Republic said last week that depositors had withdrawn more than $100 billion, most of it over a few days in mid-March.
“Too many (First Republic) clients demonstrated that their true loyalty was to their own fears,” Timothy Coffey, an analyst at Janney Montgomery Scott, a financial services firm, wrote in a note to investors.
What’s more, the large loans on First Republic Bank’s books lost value when the Federal Reserve rapidly raised interest rates last year. That way, if the bank tried to sell the loans to raise capital, it would have done so at a loss. Similar circumstances had doomed Silicon Valley Bank.
First Republic planned to sell nonperforming assets, including low-interest mortgages it provided to wealthy clients. It also announced plans to lay off up to a quarter of its workforce, which numbered some 7,200 employees, by the end of 2022. But analysts deemed those plans too small and too late.
By the middle of last week, it became clear that government intervention in the First Republic was necessary. Treasury officials called on banks to bid on it, and bankers and regulators worked over the weekend to find a way forward.
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WHICH BANK OR BANKS WILL BE NEXT? For now, analysts expect the US banking system to be spared from more big-bank bankruptcies, saying the problems at Silicon Valley Bank, Signature Bank and First Republic were unique to those institutions.
Other midsize banks suffered large deposit withdrawals and were forced to borrow from federal programs to shore up their financial statements, but none found themselves in as difficult a situation as First Republic.
For example, Dallas-based Comerica said deposits fell $3.7 billion after March 9 and the company borrowed $13 billion from federal programs “to provide protection above normal operating levels.” Still, the company earned $324 million in the first quarter, slightly less than the fourth quarter, but up from $189 million in the first quarter a year earlier.
Comerica shares fell 37% in the week after the Silicon Valley Bank crash, but have been flat ever since. On Monday, the titles fell almost 2%.
Shares of most midsize banks fell on Monday, but the falls were moderate compared to the double-digit losses of many of them on March 13.
The buying and selling of shares “hinds little to no spillover effects, which is consistent with the notion that the First Republic seizure was not a surprise,” said Krishna Guha of Evercore ISI.
_____ WHAT HAPPENS TO FIRST REPUBLIC SHAREHOLDERS? First Republic shares traded at $115 on March 8, then plunged in the days and weeks that followed, closing at $3.15 on Friday. Approximately 20 billion dollars in market value disappeared. Trading in the title was halted before US markets opened on Monday.
JPMorgan Chase, which has agreed to buy First Republic’s deposits and most of its assets, stressed that it will not take on any corporate debt or preferred shares in the bank.
After a bank fails, bondholders are among the last to receive any payment, and shareholders are at the bottom of the line. The Federal Deposit Insurance Corporation (FDIC)—the independent federal agency that ensures depositors will get their savings back if a bank fails—does not provide estimates of how likely it is that a creditor will receive their payment.
But the agency did say that its deposit insurance fund, financed in part by insurance premiums paid by banks, could take an estimated $13 billion loss from the First Republic collapse.
While conditions could change over time, that likely won’t leave anything for investors to recoup. Silicon Valley Bank and Signature shareholders were left at zero.
The denouement was fine for an interested observer.
“Although depositors are receiving protection, shareholders are losing their investments,” President Joe Biden said during a White House Rose Garden event focused on small businesses, when asked about the bank seizure. “Crucially, it’s not the taxpayers who are in a difficult situation.”