The already dire situation at First Republic Bank seems to have gone from bad to worse this week, as its stock has nose-dived after a sobering earnings report. The San Francisco-based bank appears to be on the verge of collapse, and industry observers are concerned that its troubles could spread to other financial institutions. Behind the scenes, government regulators are frantically seeking another bank to rescue First Republic by buying it, but private equity groups have been avoiding the deal.
Earlier this week, First Republic said that its customers withdrew $102 billion in the first quarter, more than half of the $176 billion it held in deposits at the end of last year. The bank has been trying to shore itself up with $92 billion in loans from the government, as well as a $30 billion temporary infusion from big banks. Despite this, the mismatch between the bank’s assets and liabilities is just too great.
Regulators are severely limited in what they can do to rescue a single bank, as they can only make depositors whole after disbanding the management team. First Republic has conceded that it will be slashing a quarter of its staff, cutting executive compensation, and reducing its real estate holdings to try to shore up its balance sheet. Meanwhile, investors have hammered its stock, which has fallen by a stunning 95% since the start of the year. Its market capitalization is now just over $1 billion.
First Republic’s predicament echoes similar situations experienced by Santa Clara’s Silicon Valley Bank and New York’s Signature Bank, which abruptly collapsed in March after panicked depositors started withdrawing their money. All these banks had to sell off their underwater assets to satisfy their depositors, thus locking in massive losses.
According to experts, bailing out weak banks by spraying taxpayers’ money everywhere is not a sustainable solution. Instead, the government should focus on assisting only those banks that prove their value by raising some equity for themselves. These banks would essentially be doing a market test, attempting to ascertain whether investors think they could revive their fortunes and still make money in the future.
Around 200 banks are at risk of failure if depositors get spooked, and we could see more banks go the same way as First Republic if the situation is not addressed. Experts are urging regulators to identify zombie banks and allow poorly managed institutions to go bankrupt. The role of government agencies should be to prevent any spillover effect that could incite panic across the financial industry.
Despite the lack of support from private equity groups, First Republic’s franchise value seems to be holding up. Several of its customers have come to its defense on social media, in media interviews, and elsewhere, citing the bank’s reputation and existing relationships with its customers. However, the bank’s future remains uncertain, and industry observers are anxiously waiting to see how the bank’s troubles unfold.