Shares of First Republic sink, as banking industry woes flare anew
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Shares of First Republic Bank were in free fall in early trading on Wednesday, continuing an astonishing decline that poses a fresh challenge for the Biden administration and industry regulators. After losing roughly half of their value on Tuesday, First Republic’s shares fell by an additional 40 percent Wednesday.
First Republic, which caters to a wealthy clientele, peaked at $147 per share in early February before the failure in mid-March of two midsize banks threatened to ignite a wider financial contagion. By late morning on Wednesday, its share price had dipped below $5.
On Wednesday, government officials, regulators and industry executives were scrambling to craft a solution to the bank’s escalating woes. Selling the bank to a healthier financial institution would be the preferred remedy. But finding a buyer willing to absorb the unrecognized losses on bonds owned by the bank will not be easy.
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“They’re going to have to intervene — I don’t think they can sell it,” said one banking source who was familiar with the ongoing discussions with senior government officials. “People have been going through the numbers and there’s been unrecognized losses there. So who is going to eat these losses?”
Like California’s Silicon Valley Bank, First Republic owns bonds that have lost value over the past year as interest rates rose at their fastest pace in 40 years. The bank can escape recognizing the losses by holding the securities until they mature in several years. But it can be forced to take the crippling financial hit now if it needs to sell the securities to raise cash to meet depositors’ withdrawal demands.
On Monday, the bank revealed that more than $104 billion of its deposits had vanished during the first three months of the year, as customers spooked by the collapse of SVB and Signature Bank of New York fled for the perceived safety of the nation’s largest institutions.
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The news came as First Republic said its first-quarter earnings had plunged nearly 20 percent.
“With the closure of several banks in March, we experienced unprecedented deposit outflows,” said Neal Holland, the bank’s chief financial officer. “We are working to restructure our balance sheet and reduce our expenses and short-term borrowings.”
First Republic appeared to have weathered the initial storm in mid-March when JPMorgan Chase led an 11-bank team in depositing with it a total of $30 billion. The move was aimed at reassuring depositors that the bank could meet future withdrawals.
On Friday, the Federal Reserve will release a much anticipated report on what went wrong with SVB last month and what should be done to avoid future failures. The report is expected to push for stricter regulations for midsize banks, such as requiring them to hold larger capital cushions to absorb financial losses.
The report may also propose undoing many of the changes to weaken oversight that Congress and the Fed implemented before the pandemic.
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Also on Friday, the Federal Deposit Insurance Corporation will release the results of its investigation into the demise of Signature Bank. It will be followed on Monday by a report outlining whether regulators should make changes to the rules for deposit insurance, which became a flash point after the government opted to guarantee all deposits — not just those up to the $250,000 federal limit — during the March crisis.
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Source: The Washington Post
