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Examining the Downfall of First Republic Bank

Author: Albany Beck
Posted in: Latest News
Read Time: 9 Min Read

The failure of First Republic Bank, one of the largest commercial banks in the United States, marks a significant event in the financial industry.

The bank's struggles began with the failures of two other US regional banks, which resulted in a decrease in deposits and the flight of its largely uninsured deposit base, including many wealthy customers. Despite efforts by JPMorgan and other large banks to invest in the First Republic and restore confidence, the bank ultimately failed and was seized by regulators. JPMorgan acquired the bulk of First Republic's operations, highlighting the importance of deposits as a bank's lifeblood and the vulnerability of banks with largely uninsured deposit bases.

                                                                                                                     (Image adapted from New York Times) 


Analysing Step by Step the Collapse of First Republic Bank

In a letter to stakeholders, Silicon Valley Bank said it needed to shore up its finances, announcing a roughly $1.8 billion loss and a plan to raise $2.25 billion in capital to handle increasing withdrawal requests amid a dim economic environment for tech companies.

Moody’s, a credit ratings firm, downgraded the bank’s bonds rating.

Silvergate, a California-based bank that made loans to cryptocurrency companies, separately announced that it would cease operations and liquidate its assets after suffering heavy losses.

Gregory Becker, the chief executive of Silicon Valley Bank, urged venture capital firms to remain calm on a conference call. But panic spread on social media and some investors advised companies to move their money away from the bank.

A Silicon Valley Bank executive wrote in a note to clients that it had “been a tough day” but the bank was “actually quite sound, and it’s disappointing to see so many smart investors tweet otherwise.”

The bank’s stock plummeted 60% and clients pulled out about $40 billion of their money.

In the biggest bank failure since the 2008 financial crisis, Silicon Valley Bank collapsed after a run on deposits. The Federal Deposit Insurance Corporation announced that it would take over the 40-year-old institution.

Investors began to dump stocks of the bank’s peers, including First Republic, Signature Bank and Western Alliance, which had similar investment portfolios. The nation’s largest banks were more insulated from the fallout, with shares of JPMorgan, Wells Fargo and Citigroup generally flat.

Treasury Secretary Janet L. Yellen reassured investors that the banking system was resilient, expressing “full confidence in banking regulators.”

Signature Bank, a 24-year-old institution providing lending services for real estate companies and law firms, saw a torrent of deposits leaving its coffers after customers panicked.

New York regulators shut down Signature Bank, just two days after Silicon Valley Bank failed, over concerns that keeping the bank open could threaten the stability of the financial system. The signature was one of the few banks that had recently opened its doors to cryptocurrency deposits.

The Federal Reserve, the Treasury Department and the F.D.I.C. announced that “depositors will have access to all of their money” and that no losses from either bank’s failure would be “borne by the taxpayer.”

The Fed said it would set up an emergency lending program, with approval from the Treasury, to provide additional funding to eligible banks and help ensure they could “meet the needs of all their depositors.”

President Biden said in a speech that the U.S. banking system was safe and insisted that taxpayers would not pay for any bailouts in an attempt to ward off a crisis of confidence in the financial system.

Regional bank stocks plunged after the unexpected seizure of Silicon Valley Bank and Signature Bank, with shares of First Republic tumbling 60%.

The Bank of England announced that banking giant HSBC would buy Silicon Valley Bank’s British subsidiary.

Bank stocks recouped some of their losses as investor fears began to ease.

The Justice Department and the Securities and Exchange Commission reportedly opened investigations into Silicon Valley Bank’s collapse.

Credit Suisse shares tumbled after investors started to fear that the bank would run out of money. Officials at Switzerland’s central bank said it would step in and provide support to Credit Suisse if necessary.

Eleven of the largest U.S. banks came together to inject $30 billion into the First Republic, which was teetering on the brink of collapse. The plan was hatched by Ms Yellen and Jamie Dimon, the chief executive of JPMorgan Chase. The Treasury secretary believed the actions by the private sector would help underscore confidence in the banking system's stability. Shares of the bank rallied on the announcement.

Credit Suisse said it planned to borrow as much as $54 billion from the Swiss National Bank to stave off concerns about its financial health.

Ms Yellen testified before the Senate Finance Committee and sought to reassure the public that U.S. banks were “sound” and deposits were safe.

The shares of many banks continued to slide, wiping out the previous day’s gains as investors continued to worry about the financial turmoil.

One day after the $30 billion lifeline was announced, First Republic’s stock plummeted again and it was in talks to sell a piece of itself to other banks or private equity firms.

UBS, Switzerland’s largest bank, agreed to buy its smaller rival, Credit Suisse, for about $3.2 billion. The Swiss National Bank agreed to lend up to 100 billion Swiss francs to UBS to help close the deal. The Swiss financial regulatory agency also wiped out $17 billion worth of Credit Suisse’s bonds and eliminated the need for UBS shareholders to vote on the deal.

The Fed and five other global central banks took steps to ensure that dollars would remain readily available in a move intended to ease pressure on the global financial system.

The F.D.I.C. said it had agreed to sell the 40 former branches of Signature Bank to New York Community Bancorp.

First Citizens BancShares agreed to acquire Silicon Valley Bank in a government-backed deal that included the purchase of about $72 billion in loans at a discount of $16.5 billion. It also included the transfer of all the bank’s deposits, which were worth $56 billion. About $90 billion in the bank’s securities and other assets were not included in the sale and remained in the F.D.I.C.’s control.

Mr Biden called on financial regulators to strengthen oversight of midsize banks that faced reduced scrutiny after the Trump administration weakened some regulations. The president proposed requiring banks to protect themselves against potential losses and maintain enough access to cash so they could better endure a crisis, among other things.

While testifying before Congress, officials at the Fed, the F.D.I.C. and the Treasury Department faced tough questions from lawmakers about the factors that led to the failures of Silicon Valley Bank and Signature Bank.

Michael S. Barr, the Fed’s vice chair for supervision, blamed bank executives and said the Fed was examining what went wrong, but provided little explanation as to why supervisors did not prevent the collapse.

The country’s largest banks — including JPMorgan Chase, Citigroup and Wells Fargo — reported robust first-quarter earnings, signalling that many customers had developed a strong preference for larger institutions they viewed as safer.

First Republic’s latest earnings report showed that the bank lost $102 billion in customer deposits during the first quarter — well over half the $176 billion it held at the end of last year — not including the temporary $30 billion lifeline. The bank said it would cut up to a quarter of its workforce and reduce executive compensation by an unspecified amount.

In a conference call with Wall Street analysts, the bank’s executives said little and declined to take questions.

The bank’s stock dropped about 20% in extended trading after rising more than 10% before the report’s release.

First Republic’s stock closed by 50% after the troubling earnings report.

First Republic’s stock continued its tumble, dropping about 30% and closing the day at just $5.69, a decline from about $150 a year earlier.

The Fed released a report faulting itself for failing to “take forceful enough action” ahead of Silicon Valley Bank’s collapse. The F.D.I.C. released a separate report that criticized Signature Bank’s “poor management” and insufficient risk policing practices.

First Republic was taken over by the F.D.I.C. and immediately sold to JPMorgan Chase, making it the second biggest U.S. bank by assets to collapse after Washington Mutual in 2008.

Navigating Uncertainty: Insights on Recent Market Events and Bank Failures

The global market has been put to the test by a series of significant events in recent months. According to a report by JP Morgan report a 60/40 portfolio of stocks and bonds has returned 5% so far, several factors have added uncertainty and complexity to the investment landscape.

The technology sector is one of the main drivers of market performance this year. Companies with strong balance sheets and competent management teams have been a haven for investors seeking high-quality assets. This led to a surprising 20% increase in the technology sector. 

                                                                                                                              (Image adapted from JP Morgan report)

However, it is important to remain cautious in the face of potential headwinds. Central bank rate hikes and credit restrictions can have a significant impact on the economy, and there could be aftershocks. Although markets have largely weathered the recent bank failures, investors should remain aware of the potential ripple effects on the entire financial system.

A key question to consider is whether there are signs of contagion in the wake of the recent bank failures. The safety of cash in checking and savings accounts has been challenged, leading to a rush of deposits from small banks to larger institutions and money market funds. Although this trend has raised concerns about bank liquidity, there are indications that depositors' fears are subsiding.

Policymakers have taken significant steps to address these concerns and strengthen confidence in the banking system. Failed banks have been supported and liquidity has been provided to all banks through the Federal Reserve's discount window and the new Bank Term Funding Program. This helped to ensure that banks had the liquidity they needed to meet the demands of their depositors.

Although these actions helped alleviate concerns to some extent, it is important to monitor the degree of panic among depositors and the resulting pressure on banks. Although lending remains high, it appears to be declining, suggesting that liquidity strains may not worsen.

Notwithstanding the recent sale of parts of First Republic Bank to JPMorgan did not bring much relief to financial markets. Regional bank stocks continued to fall, and investor disappointment was evident in larger regional banks such as Citizens Financial and PNC, which fell more than 6%. Meanwhile, JPMorgan, Wells Fargo and Citigroup posted gains, indicating that investors perceive that the larger banks have implicit government support. First Republic's resolution is not seen as a sign that the banking panic is over, but rather a reason to keep an eye on other weaknesses in the system.

Smaller banks such as Valley National Bank, PacWest Bancorp, and HomeStreet Inc. have also seen declines in their shares, perhaps due to rising deposit costs and concerns about profitability. Emergency loans to the national banking system remain high, suggesting that it may be premature to think that the banking crisis is over.

10 Strategies for Businesses to Manage the Fallout from a Bank Collapse

The collapse of a major bank like First Republic Bank can have a significant impact on businesses in the industry, including consultancy firms and other banks. Here are some potential strategies that these businesses could consider to deal with the fallout of such an event:

1) Reassure customers and stakeholders: The collapse of a bank can lead to concerns among customers and other stakeholders, such as investors or partners. Businesses in the industry should communicate clearly and proactively with these groups to reassure them of their stability and the steps they are taking to mitigate any potential impact.

2) Review and adjust risk management practices: The failure of a bank can be seen as a warning sign of potential systemic risks in the industry. Consultancy firms and banks should review their risk management practices and adjust them as needed to avoid similar problems and reassure customers and stakeholders that they are taking appropriate steps to manage risk.

3) Diversify business offerings: If a consultancy firm or bank is heavily reliant on a single institution for business, the collapse of that institution can have a major impact. Businesses in the industry should consider diversifying their offerings and client base to reduce this risk.

4) Collaborate with other firms and institutions: In the aftermath of a major event like the collapse of a bank, businesses in the industry may need to collaborate more closely with other firms and institutions to manage risks and ensure stability. This could involve partnerships, joint ventures, or other forms of cooperation.

5) Evaluate financial exposure and adjust accordingly: Consultancy firms and banks should evaluate their financial exposure to the collapsed bank, including any outstanding loans or investments. They should adjust their financial strategies accordingly to minimize any losses and protect their financial stability.

6) Develop contingency plans: The collapse of a major bank can have unpredictable and far-reaching effects. Businesses in the industry should develop contingency plans to prepare for a range of potential scenarios, including changes in market conditions, shifts in customer demand, and other disruptions.

7) Seek expert advice and support: In the aftermath of a bank collapse, businesses in the industry may need expert advice and support to navigate the complex landscape. This could include legal, financial, or regulatory experts who can guide how to manage risk and maintain stability.

8) Communicate with regulators and industry bodies: The collapse of a bank can trigger regulatory responses and industry-wide discussions about risk management and stability. Consultancy firms and banks should engage with regulators and industry bodies to share their insights and contribute to these discussions.
9) Focus on long-term stability and growth: While the collapse of a bank can be a significant short-term challenge, businesses in the industry should also focus on long-term stability and growth. This could involve investing in new technology or innovation, expanding into new markets, or pursuing other strategies that can help build a more sustainable future for the industry.

10) Stay informed and be prepared: The collapse of a major bank can be a complex and unpredictable event, with impacts that ripple through the entire industry. Consultancy firms and banks should stay informed about developments and be prepared to adapt their strategies and practices as needed to ensure stability and manage risks.

In a nutshell, the collapse of a major bank can have significant ripple effects throughout the industry, affecting firms of all sizes, including consulting firms and other banks. To manage the consequences of such an event, these firms must take proactive measures to mitigate risk, reassure stakeholders, and maintain stability. 

Strategies such as reassurance and communication, risk management adjustment, diversification, collaboration, information, financial exposure assessment, contingency planning, seeking expert advice, and industry engagement can contribute to making the industry more resilient and prepared.

By continuously monitoring and reviewing risk management practices and investing in technology and innovation, firms can also build long-term stability and growth while meeting the challenges of a rapidly changing financial landscape.