First Republic Bank is the next in line for running. The 14th largest bank in the United States is facing a dire situation after it reported massive deposit outflows and borrowed billions of dollars to replace them with loans. Its stock fell by 50%, triggering a series of trading halts by the New York Stock Exchange. It raised concerns about its future and the broader financial system. What are the causes and consequences of First Republic Bank’s predicament? Which challenges and options it has to face to save itself absent government intervention?
WHAT IS HAPPENING TO THE FIRST REPUBLIC BANK?
According to the NYTimes last reportings, the First Republic Bank’s stock fell by 50% after it reported a massive $102 billion in deposit outflows in the first quarter, which is over half of the $176 billion it held at the end of last year. The bank had borrowed $92 billion to replace these deposits with loans, mostly from the Federal Reserve and government-backed lending groups. Its executives also refused questions during a conference call with analysts, leading to a series of volatility-induced trading halts by the New York Stock Exchange.
The bank also announced that it would cut up to a quarter of its workforce and slash executive compensation. The bank is considered the most vulnerable regional bank after the banking crisis in March, and its failure could affect investors’ confidence in other regional banks and the broader financial system. The bank’s options to save itself absent government intervention are limited and challenging, and there are no easy solutions.
WHAT ARE THE POSSIBILITIES FOR A FRC?
As specified by CNN, there are three possibilities for escaping the bank run:
The first option for the First Republic Bank is to stay the course and wait for its securities and loans to mature, which could be a long road but would allow the bank to continue operating as a standalone company. The bank’s CEO, Michael Roffler, has assured investors that they have enough liquidity to pursue this option, with twice the available liquidity of uninsured deposits, excluding the $30 billion received from large banks.
The second option for First Republic (FRC) would be to sell some of its loans and securities at the same cost they bought them for, offering the buyer a preferred equity interest in the company. However, this is a hard sell since those assets would likely sell well above the market rate. If First Republic fails, the FDIC will likely offer insurance to all depositors, even those without insurance, costing large banks tens of billions of dollars. Private equity could still swoop in and save the day, as they are willing to take on more risk than big banks. Bloomberg reported that First Republic is looking to sell as much as $100 billion of its loans and securities.
The third option is receivership, where a regulatory authority or government agency takes control of the bank and its assets. This would result in the bank’s assets being liquidated to pay its creditors, and equity holders and preferred equity holders would see their money wiped out. The FDIC is reportedly considering lowering First Republic’s financial ratings, which could hinder its ability to use the Fed’s overnight lending program. However, officials at the Federal Reserve may start pressuring the bank to arrange an orderly wind-down and communicate with potential private capital providers.
The next days are crucial for the fate of the First Republic Bank. Its failure could cause a loss of confidence in the banking system and lead to a broader financial crisis. The domino effect of a banking panic could trigger a recession, which would have a negative impact on not only the US economy but also the global economy. This could also lead to a decrease in lending and liquidity in financial markets, making it harder for businesses to obtain financing and potentially leading to a credit crunch. Additionally, the failure of a large bank could lead to a loss of investor confidence, which could cause stock markets to decline and destabilize financial systems in other countries.
[…] The diminishing trust has given rise to a feeling that banks are confronting difficulties or possibly facing a state of decline (more about it here and here). […]