Is First Republic A New Hot Mess?

First Republic, a mid-sized bank based in San Francisco, recently received a capital infusion of $30 billion from 11 rival banks to stabilize its balance sheet after the collapse of Silicon Valley Bank (SVB). This article explores the history of First Republic Bank, the concerns that led to the capital infusion, and the actions taken by regulators & financial institutions to protect depositors.

Introduction

The most serious banking crisis since the Great Financial Crisis of 2008 has already claimed four victims – three in USA & one in Europe. In USA, Silvergate was the first to fall, followed by the sudden collapse of Silicon Valley Bank (SVB) & then the closure of Signature Bank in New York. In Europe, the Swiss authorities have arranged UBS to take over Credit Suisse Bank, after an unprecedented crisis of confidence in the Credit Suisse.

Now First Republic, a San Francisco based 14^th Largest Bank in US, has to be rescued by capital infusion. This capital infusion came from 11 rival banks including US largest lender. On 16^th March 2023, the Federal Regulators said that to stabilize its balance sheet in the aftermath of Silicon Valley Bank Collapse.  First Republic Bank has reached an agreement with some of the largest US banks. Accordingly it will receive $30 billion in deposits from 11 banks. 

Brief History of First Republic Bank

On 1^st July, 1985, First Republic (FR) was founded by Jim Herbert, at 201 Pine Street in San Francisco (now it is in 111 Pine Street, 2nd Floor according to its financial statement) with fewer than 10 colleagues. Initially with only one office and with an enterprise value of $8.8 million. FR was one of the smallest banks in the US out of approx. 14,000 banks.

As on 2021, the FR bank has 82 bank offices with more than 5000 employees. FR bank has grown to become 14^th largest commercial bank by deposits and the 11^th largest by market capitalization by the end of 2021. There was an Organic growth from initial capital of $8.8 million to a market capitalisation of $37.1 billion. 

First Republic and its subsidiaries provides private banking, private business banking and private wealth management. Services are offered through preferred banking or wealth management offices primarily in San Francisco.

What Concern Spiralled for the Capital Infusion?

On 16^th March, 2023, the 11 banks moved to end this spiralling banking crisis by capital infusion in the First Republic – a midsized Bank, whose shares have been pummelled due to widespread banking turmoil. As the fear was mounting that FR could be the next bank to collapse as a breather to it the Capital Infusion has happened. 

Many investors saw the similarities between SVB and the First Republic (another mid-size bank). The two third of bank deposits are uninsured compared to 94% of SVB. Another worrying factor, according to S&P is loan-to-deposit ratio (111%), this means loans are provided more than deposited amount. 

Federal Republic and Capital Infusion

The Capital infusion has been happening in Federal Republic for quite sometimes in various forms. The list of events of the same are as follows:

1. The bank has increased short-term borrowings from the Federal Home loan bank by $10 billion at a rate of 5.09% since 9^th Marc 2023. 
2. Bank borrowings from the Federal Reserve was carried from 10^th March to 15^th March, 2023. This Bank borrowings varied from $20 billion to $109 billion at an overnight rate of 4.75%
3. The bank had cash position of approx. $ 34 billion as on 15^th March, 2023
4. On 16^th March, 2023, FR received uninsured deposits totalling $30 billion from Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, Goldman Sachs, Morgan Stanley, Bank of New York Mellon, PNC Bank, State Street, Truist, and U.S. Bank.

The break up of the capital infusion/ Deposit amount is as follows:

Federal Regulators assurance and Swift Actions

The Federal Regulators took various steps to protect all depositors of the two failed banks. On the 13^th, March, 2023 (i.e. Monday), Morning the customers of the two failed banks were able to access all of the money in their accounts (deposits). However, Shareholders and Debtholders are not being protected by the Government. No Taxpayer money is used or put at risk for protecting the depositor’s money. The protection for the Deposits is provided by Deposit Insurance Fund, which is funded by fees from banks.

With a new lending facility, the Federal Reserve is giving an additional support to the banking system – this will help to meet the needs of all the deposits with the Financial Institutions. 

In the Testimony of Secretary of the Treasury Janet L. Yellen Before the Committee on Finance, U.S. Senate stated that 

“I can reassure the members of the Committee that our banking system remains sound, and that Americans can feel confident that their deposits will be there when they need them. This week’s actions demonstrate our resolute commitment to ensure that depositors’ savings remain safe.”

Not only the regulator is doing their best to stop the banking crisis but also the financial institutions are also supporting each other to come out of the crisis. 

In a statement, the lenders stated the action was intended to showcase their commitment to lenders like First Republic Bank. They said that 

“Regional, midsize and small banks are critical to the health and functioning of our financial system,” 

Whatsoever, the most important thing is these 11 financial institutions have saved another bank from sinking. There are many unanswered questions for which we are still looking for an answer. Hope, the coming days will give more rays of hope for the bankers as well as depositors to breathe in comfort. 

Conclusion

The capital infusion in First Republic Bank has sparked questions about the stability of mid-sized banks and the actions taken by regulators & financial institutions to protect depositors. While the Federal Regulators & financial institutions are doing their best to stop the banking crisis, uncertainties remain about the long-term effects on the banking industry.

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