First Republic Bank Teeters on Edge of Abyss

First Republic is teetering on the edge of the abyss this weekend, likely to be seized by the government after customers withdrew around $100 billion of deposits in just a few days and seeing its share price crash toward oblivion.

The San Francisco-based bank was shaken by similar factors that triggered the collapse of Silicon Valley Bank. The Federal Reserve’s rapid interest rate increases hurt the value of the bank’s assets and made its funding pricier. Depositors could increasingly earn better returns on money market mutual funds that park assets with Fed facilities, an investment many see as even safer than “money in the bank.”

Republicans will be quick to chalk this up as another Bidenflation bank failure. The Fed belatedly began to raise interest rates last year after President Joe Biden’s expansive fiscal policies helped push inflation to its worst levels in four decades.This has caused significant problems for banks to grew aggressively during the low-interest rate era that preceded the pandemic and then returned when the pandemic struck.

The Wall Street Journal reported late Friday night that big banks, including J.P. Morgan Chase and PNC Financial Services, were vying to buy First Republic after the expected seizure by the Federal Deposit Insurance Corp.

Investors and depositors grew worried about First Republic as Silicon Valley Bank failed in March because it had some similar problems with its balance sheet. The bank had funded many long-term assets with very low yields with less-stable sources of funding, including a high percentage of deposits larger than the amount insured by the FDIC. These large deposits are now seen as likely to leave a bank if depositors fear it may fail.

Still, some of the concerns seemed to abate following actions taken by the Fed as Silicon Valley Bank and Signature Bank in New York were seized. The government extended protection of deposits at those banks above the FDIC insurance limit and the Fed created a new lending facility that banks could turn to for funding.

On Monday, however, First Republic released dismal earnings and said the deposit run had drained around $100 billion from the bank. The loans from the Fed and the Federal Home Loan Bank had filled the hole created in the balance sheet but those loans were expensive. Many analysts believed the bank was likely paying more on its liabilities than it earns on its assets, an unsustainable situation.

Shares of First Republic crashed by nearly 50 percent in a single day. So far this year, they have lost 97 percent of their value, a sign that investors doubt the viability of the bank. Shares that traded at $115 prior to the collapse of Silicon Valley Bank closed at $3.51 on Friday.

It is unlikely the bank will be able to open for business on Monday. Many expect an announcement on Sunday night that the FDIC has taken the bank into receivership with plans on selling the bank or perhaps its assets to larger, more stable banks.