Next to Fail: First Republic

Update: California bank regulators shut down First Republic bank early Monday morning and placed it in receivership with he FDIC. Shortly thereafter the failed bank was purchased by JP Morgan, the bank of bankers. Morgan now owns all of the deposits and most of the assets of First Republic as a result of the distress sale, which has been criticized as an example of weak regulation. As part of the deal Morgan will share the transaction losses with the FDIC and pay the agency $10.6 billion. The agency admits its insurance fund will take a $13 billion hit.  

With estimated assets of $291.1 billion as of April 15th, First Republic is the second largest bank failure in US history, surpassed only by Washington Mutual in 2008. Morgan also bought Washington Mutual. "This is getting near the end of it, and hopefully this helps stabilize everything,” Morgan CEO Jammie Dimon told reporters. The New York Federal Reserve said financial conditions had "deteriorated sharply" in in its regions in an April summary of broader economic conditions.  According to one study in March, US banks are carrying $1.7 trillion in unrealized losses on their books, which is only slightly less than the total equity in the banking system of $2.1 trillion in 2022.  Banks hedge against the njmjnmn interest rate risk of their investments and loans with deposits.  This system works as long as there are no bank runs and hedging is managed properly.

After the GAO blamed bank regulators in part for the Silicon Valley collapse, federal regulators are anxiously watching the action at San Francisco's First Republic Bank. Bank shares have fallen by 90% this year The slide was triggered by a bad earnings report.  Shares are now worth just $3 and change after hitting a peak of $220 in late 2021. Federal Reserve, US Treasury, and FDIC officials are meeting with banking people to flesh out a rescue plan for the failing institution. The planning could result in an FDIC takeover, and sale of discounted bank assets according to business media reports.  Losses would be covered by banks subscribing to the insurance program and not taxpayers.  JP Morgan and a group of other banks infused First Republic with $30 billion in time deposits, but apparently that was not enough cash to counteract the crisis.

Wealthy depositors began withdrawing money from First Republic during the panic created by the failure of Silicon Valley Bank and Signature Bank in March. The bank reported outflows of $100 billion in the first quarter of this year.  The bank said it had to replace the withdrawn money with interest-bearing money from the Federal Reserve. Low-interest loans and investments in a high-interest environment are plaguing the bank in a similar way to the conditions that brought down Silicon Valley and Signature.  Like those banks, its business focus was on high net worth individuals and their businesses. More than two-thirds of its deposits surpassed the FDIC’s $250,000 insurance limit. The bank's slogan is, "It's a privilege to serve you." How fickle the rich!