Regulators searched for a solution to First Republic Bank’s issues throughout the weekend in an attempt to do so before the Monday stock market opening in the United States.
First Republic, a San Francisco-based bank, has suffered since the demise of Silicon Valley Bank and Signature Bank in early March as investors and customers were more apprehensive that the bank would not survive as an independent company. The bank’s shares dropped from almost $170 per share, where it had been trading for a year, to $3.51 on Friday. It fell much more during after-hours trade.
Since Silicon Valley Bank’s demise, the world markets have occasionally been rattled by worries about unrest in the banking industry. Due to the May 1 celebrations, several markets throughout the globe were closed on Monday. Despite little change in U.S. futures on Monday, the two open Asian markets in Tokyo and Sydney saw gains, with the contract for the S&P 500 rising by almost 0.1%.
First Republic has been described as the bank most likely to collapse next due to its substantial uninsured deposits and exposure to low interest rate lending.
Gary Cohn, a current economic advisor and former CEO of Goldman Sachs, said in an interview with CBS News’ “Face the Nation” on Sunday that the Federal Deposit Insurance Corporation “would prefer to sell the bank in its entirety than in pieces.”
According to Cohn, the FDIC will probably assume control while also reselling the asset to the highest bidder.
Cohn said that in contrast to what happened with Silicon Valley Bank, he expects a “much faster process” in this situation.
First Republic reported having $233 billion in total assets as of March 31. At the end of the previous year, the Federal Reserve ranked First Republic as the 14th largest commercial bank in the country.
Before Silicon Valley Bank failed, First Republic had a banking franchise that was the envy of the majority of the sector. Its mostly rich and influential clientele virtually ever fell behind on their loan payments. The CEO of Meta Platforms is apparently one of individuals who benefitted from the 72-branch bank’s low-cost loans to the rich.
However, like those in Silicon Valley and Signature Bank, the vast majority of First Republic’s deposits were uninsured, that is, they exceeded the $250,000 FDIC insurance cap. As a consequence, analysts and investors started to worry. If First Republic collapses, depositors could not receive all of their money returned.
These concerns were contained in the bank’s most recent quarterly reports. Depositors allegedly withdrew more than $100 billion from the bank during the April crisis, according to the bank. The San Francisco-based First Republic said that only after other big banks intervened to rescue it by giving it $30 billion in uninsured deposits was it able to stem the haemorrhage.
According to Steven Kelly, a researcher from the Yale School of Management’s Programme on Financial Stability, getting the bank into the hands of a larger firm would have the best economic results. Despite being consistently successful and possessing extensive client data, First Republic’s economic model is unstable. It has to be supported by a big bank balance sheet.
Kelly said that alternative choices, such as continuing to attempt to make it on one’s own or submit to state supervision, would result in further declines in credit, economic growth, and value.
According to Kelly, a successful integration into a large bank would provide the business with a proper, safe environment in which to continue providing its value proposition to the economy.
Since the crisis, First Republic has been looking for a strategy to quickly bounce back. The bank intended to liquidate its non-performing assets, which included the low-interest mortgages it had provided to wealthy clients. Additionally, it disclosed intentions to let go of up to 25% of its workforce, which stood at about 7,200 people as of the end of 2022.
But investors continue to be pessimistic. Since the bank disclosed its results, its executives have turned down every request for an interview from analysts or investors, which has led to a further decline in the stock price.
Additionally, it is challenging to profitably restructure a balance sheet when a company needs to quickly sell off assets and has fewer bankers to identify opportunities for the bank to invest in. It took years for banks like Citigroup and Bank of America to start making money again after the global financial crisis 15 years ago, and those institutions benefitted from a government-sponsored backstop to keep them operational.
