Is First Republic Bank The Next Bank To Be Taken Over By US Government? Here Are The Problems With It

Is First Republic Bank The Next Bank To Be Taken Over By US Government? Here Are The Problems With It

First Republic Bank

First Republic Bank, Nov. 27, 2017 in New York. (AP Photo/Mark Lennihan)

San Francisco-based regional bank First Republic saw a 60 percent decline in stock prices during a selloff Monday despite extraordinary measures taken over the weekend by regulators to protect depositors at failed Silicon Valley Bank and Signature Bank.

Stock prices rebounded somewhat Tuesday at First Republic and other regional banks, but fears of contagion from the collapsed Silicon Valley Bank have now spread to other regional banks around the Bay area, SFist reported. 

Reinforcing concerns over the health of regional banks after the collapse of SVB, Moody’s Investors Service on Monday placed First Republic Bank and five other U.S. lenders on review for downgrade, citing concerns over their reliance on uninsured deposit funding and unrealized losses in asset portfolios. 

Reuters reported that about 70 percent of First Republic Bank deposits are uninsured, above the median of 55 percent for medium-sized banks and the third highest in the group after Silicon Valley Bank and Signature Bank, according to a Bank of America note.

First Republic Bank stock was trading at $46.36 as of this writing, down from $82.45 when the market closed on Friday.

In addition to backstopping the deposits at SVB and Signature Bank, federal regulators also announced efforts Sunday to stabilize the wider banking system.

Late Sunday, First Republic announced a $70 billion infusion from JP Morgan Chase & Co and additional liquidity from the Federal Reserve. First Republic has been able to meet withdrawal demands with the help of the funding, Executive Chairman Jim Herbert, told CNBC.

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One of the Fed’s extraordinary measures is its newly created Bank Term Funding Program, which offers loans for up to a year to banks in exchange for high-quality collateral assets such as Treasurys. The Fed also eased conditions at its discount window — a tool that makes liquidity available to institutions that cannot satisfy their liquidity needs by borrowing on the private market, according to the Richmond Fed.

First Republic shares fell more than 70 percent on Monday prior to the market opening, according to KPIX, before trading was paused. The bank’s stock declined 33 percent last week. PacWest Bancorp fell 32 percent, and Western Alliance Bancorp lost more than 50 percent as regional bank stocks fell sharply. Zions Bancorporation fell 19 percent and KeyCorp was down 23 percent, CNBC reported.

First Republic Bank sent clients an email meant to calm them, as reported by CNN. “In light of recent industry events, the last few days have caused uncertainty in the financial markets,” the email said. “We want to take a moment to reinforce the safety and stability of First Republic, reflected in the continued strength of our capital, liquidity and operations.”

“Those words are carefully chosen to calm spooked investors,” Joe Kukura wrote for SFist. “But when you even have to say such things, you know you’re in trouble.”

SVB partnered with nearly half of all venture-backed U.S. tech and healthcare companies and 85 percent-to 90 percent of SVB’s deposits were uninsured, according to estimates in a recent regulatory filing. 

While First Republic is not as concentrated in one industry as SVB was with technology, it does tend to cater to businesses and wealthy people with large uninsured deposits.

The banking implosions come after multiple Federal Reserve interest rate hikes over the past year, which pushed down yields on the 2-year Treasury note by the most since the 2008 financial crisis.

Each regional bank has exposure to different parts of the market and the fate of regional bank stocks will be “case by case” as investors look to see which ones could have the most negative exposure, said Art Hogan, chief market strategist at B. Riley Wealth.

The market is “finding out in real time what the risk of rising interest rates at such a fast pace can do to the balance sheets of some of the regional banks,” Hogan said.

The market is focusing on smaller banks with specialty lending businesses, according to Brian Levitt, global strategist at Invesco. After Silicon Valley Bank, investors are looking to the next bank most exposed to interest rate and specific credit risks. “First Republic Bank, which has significant exposure to the coastal real estate markets appears to be next on the list,” Levitt said.

“Unfortunately, one of the first consequences of SIVB’s collapse is probably that it will cause a flight of uninsured deposits from smaller, less diverse banks to larger, more diverse ones,” Oppenheimer analyst Chris Kotowski said in a note to clients.

“We believe regionals with less diversified and large uninsured deposit bases are at risk of deposit flight but not at the speed of SVB and they should have time to tap wholesale funding markets and raise cash levels,” Citi analyst Keith Horowitz said in a note to clients.

Besides First Republic Bank, five other lenders are on review for a Moody’s downgrade including Western Alliance Bancorp., Intrust Financial Corp., UMB Financial Corp., Zions Bancorp and Comerica Inc., Bloomberg reported.