First Republic teeters on the edge — again

By Krystal Hur, CNN

First Republic Bank’s fate is looking grim.

The bank’s stock has plummeted about 75% this week, after a disappointing first-quarter earnings report Monday revived Wall Street’s fears about a banking crisis and catalyzed an exodus out of First Republic stock. While a small rally on Thursday suggested that investors were hopeful that a white knight could swoop in to save the embattled lender, things eventually took a turn for the worse.

An administration source familiar told CNN Friday the White House has no new plans to rescue the embattled lender, snuffing out hopes of government intervention. Reports swirled that the bank will likely go into receivership by the Federal Deposit Insurance Corporation, shattering optimism that private sector help could be on the way. Shares of the bank plunged roughly 37%.

It remains unclear whether the bank will collapse. While there’s a chance it could happen Friday — when financial institutions have historically failed — it could happen another day. Or, the bank could survive.

But that will be difficult to achieve without a lifeline. First Republic already received about $100 billion in life support from big banks last month, when the collapses of Silicon Valley Bank and Signature Bank sent investors and depositors fleeing from regional banks and put the health of the financial sector in question.

Shares of First Republic are down roughly 97% this year.

Signs of trouble

Trouble for First Republic started brewing this week after the company reported that its total deposits fell 41% in the first quarter to $104.5 billion. Analysts had expected deposits of around $136.7 billion.

CEO Michael Roffler tried to assure spooked shareholders on the company’s 13-minute, no-questions-taken conference call that deposit activity had stabilized since the end of March.

About two-thirds of First Republic’s deposits were uninsured with the FDIC when the banking turmoil took hold in March, lower than the 94% at Silicon Valley Bank. But at the end of 2022, First Republic had a whopping ratio of 111% for loans and long-term investments to deposits, according to S&P Global. In other words, the bank has loaned and invested more money than it has in deposits, subjecting it to liquidity risk.

Roffler said on the bank’s earnings call that the bank had twice the available liquidity of uninsured deposits as of April 4, excluding the $30 billion received from large banks.

But investors remained jittery, and a brutal sell-off began. Shares of First Republic’s stock plunged 50% on Tuesday and spiraled in the days following.

Behind the scenes, First Republic scrambled to save itself once again. Advisers lined up potential buyers of its stock and vied for big US banks to purchase bonds from the bank, according to CNBC.

The stock rose roughly 9% on Thursday, as investors breathed a sigh of relief after other banks reported their earnings with no additional bad news, before nosediving once again.

Déjà vu

First Republic’s fight for survival comes just over a month after Silicon Valley Bank’s collapse on March 10. The government shut down New York-based Signature Bank the Sunday after and moved to guarantee all deposits at both lenders. The Federal Reserve established additional funding for eligible financial institutions to prevent future runs on similar banks.

While Wall Street seemed to mostly shrug off the banking turmoil, with stocks gaining in the first quarter and staying relatively resilient through a bumpy earnings season, many investors remained unconvinced that banks were out of the woods.

That’s partly because the Fed’s rate-hiking campaign — which has fueled stresses in the banking sector — is ongoing. Wall Street expects the central bank to raise rates by a quarter point at its May meeting, and pause and even cut rates later this year. But inflation remains sticky, recession fears are mounting and it remains uncertain whether the Fed will indeed ease up on its fight to stabilize prices.

Lawmakers and investors alike sought answers for how the banks collapsed.

Federal regulators on Friday morning released a highly anticipated review on the missteps that led to SVB’s collapse. The Federal Reserve, SVB’s primary regulator, said in the report that it “did not fully appreciate the extent of the vulnerabilities as Silicon Valley Bank grew in size and complexity” and “did not take sufficient steps” to ensure that the bank resolve its problems quickly.

“Contagion from the firm’s failure posed systemic consequences not contemplated by the Federal Reserve’s tailoring framework,” the Fed report said.

Michael Barr, the Fed’s vice chair for supervision, also called for the central bank to reevaluate its regulatory and supervisory function.

The FDIC on Friday unveiled its own review of Signature Bank’s collapse, citing “poor management” and a lack of understanding of the risks attached to cryptocurrencies.

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