$30 Billion First Republic Bank Rescue Plan Fails to Alleviate Investors’ Concerns

Two primary ways that banks can fail are when the value of their loans and other assets falls below the amount of equity on their balance sheets, or when depositors fear they will lose their deposits and withdraw their funds before the bank runs out of cash. First Republic Bank, which saw its stock trading halted on March 14, followed the second path to failure. On March 16, it received a $30 billion rescue package from 11 banks, including JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo, who will deposit the funds in First Republic’s coffers and receive interest on their deposits while keeping the funds at the bank for 120 days. This move has raised questions and concerns among investors, as the bank’s stock has plummeted by 20% since the announcement of the rescue package. First Republic had suffered from an outflow of deposits in the last week, but this rescue package will help to funnel some of that outflow back to the bank.

Why First Republic Required a Rescue

First Republic needed a bailout as it shares similarities with Silicon Valley Bank (SVB), primarily due to serving similar clients, being heavily dependent on uninsured deposits, and experiencing a downturn in business with rising interest rates.

Before the Federal Reserve began raising interest rates in March 2022, First Republic’s business and stock-market valuation were top-notch. According to the Wall Street Journal, First Republic’s clients are affluent individuals and businesses primarily on the coasts, and the lending business focuses on providing enormous mortgages to clients such as Mark Zuckerberg. The majority of the loans never went bad.

A bank that relies heavily on deposits above $250,000 is more vulnerable to a bank run. First Republic was overly dependent on such deposits, with approximately 70% of its deposits being uninsured, above the median of 55% for medium-sized banks and the third-highest in the group after Silicon Valley Bank (94%) and Signature Bank (90%), according to a Bank of America note.

Despite having around $213 billion in assets, $176 billion in deposits, and increasing profits last year, deposits were leaving the bank. As the Wall Street Journal noted, the Fed’s rate increases meant that affluent First Republic customers were no longer “content to leave huge sums of money in bank accounts that earned no interest.”

Specifically, First Republic customers withdrew billions of dollars in deposits. On March 12, the bank announced additional funding from the Fed and JPMorgan, bringing its “available liquidity” to $70 billion. On March 16, First Republic stated that it had borrowed “as much as $109 billion from the Fed one night within the past week”; that insured deposits had remained stable over the past week, and that deposit outflows had “slowed considerably.”

What’s Next for First Republic?

Two rating agencies have bleak prospects for First Republic. Investors’ uncertainty over the bank’s prospects prompted Fitch Ratings to downgrade its credit rating on March 15, as reported by Politico.

On March 16, S&P cut First Republic Bank to junk on the risk of outflows. As S&P stated, “We expect increased wholesale borrowings to further weigh on its net interest margin at First Republic. We believe that First Republic’s deposit base is more concentrated than most large US regional banks, which presents heightened funding risks in the current environment.”

Furthermore, First Republic may not be able to take advantage of the Federal Reserve Bank’s new “Bank Term Funding Program” (BTFP). BTFP provides loans to banks under easier terms than the Fed typically provides.

Under the new program, banks can provide collateral valued at 100 cents on the dollar rather than marking them to their current market value, which is likely to be lower since the Fed began raising interest rates a year ago.

Unfortunately, as Yahoo! Finance reported, First Republic “does not have the type of collateral that the Fed is looking for.”

Furthermore, analysts expressed concern regarding the length of time it would take for First Republic to liquidate assets to cover deposit withdrawals in the event of a bank run. As reported by The New York Times, “The bank’s substantial real estate loan portfolio [led analysts to suggest] that First Republic did not possess enough easily liquidatable assets.”

Additionally, similar to SVB, First Republic has experienced a reduction in the value of its bond portfolio as a result of elevated interest rates. According to CNBC, the markdown in First Republic’s held-to-maturity bond portfolio would result in “approximately a $25 billion deficit on First Republic’s balance sheet.”

According to First Republic’s 2022 10K, this loss is $8 billion more than the bank’s $17 billion in shareholders’ equity at the end of 2022, which may help explain why efforts to acquire First Republic did not succeed, as reported by CNBC.

What Should Depositors In The 11 Banks Do? Depositors with over $250,000 in their accounts should contemplate dividing their funds among multiple accounts that fall below the FDIC insurance threshold at the largest banks.

This is due to Treasury Secretary Janet Yellen’s assertion that uninsured deposits would only be insured if “a failure to protect uninsured depositors would create systemic risk and significant economic and financial consequences,” as stated by CNBC.

I would suggest that individuals with substantial cash reserves consider investing in money market funds that offer higher yields. For instance, the Fidelity Money Market Fund paid a 7-day yield of 4.34% on March 16.

If I had deposits earning less than 1% in First Republic, I would prefer to invest them in a Money Market fund of this nature.

The ‘Rescue Package’ for the 11 Banks: What’s in it?

I perceive little advantage for the 11 banks in participating in this “rescue package.”

Similar to his role in 2008, JPMorgan CEO Jamie Dimon is once again leading a financial rescue effort, but without all the risks. In 2008, JPMorgan’s acquisitions of Bear Stearns and Washington Mutual made it “the nation’s biggest coast-to-coast bank,” according to Yahoo! Finance, but also resulted in “years of legal and regulatory headaches” for Dimon, who stated, “if [I] could do it over again [I] would not have purchased Bear Stearns.”

The benefits of the First Republic rescue for the 11 banks are modest. Deposits will earn a very low interest rate; in December, First Republic paid less than 1% interest on checking accounts. However, there may be an ego boost from feeling that the $30 billion “is strengthening the banking industry, which lifts all boats,” according to Yahoo! Finance.

Since the announcement of the rescue plan, First Republic’s shares have fallen significantly, indicating that more must be done to truly save the bank and alleviate investor concerns about the financial system.