Is the US banking crisis re-emerging due to the problems of the First Republic?

Is the US banking crisis re-emerging due to the problems of the First Republic?

Another US bank is in big trouble. This time it’s about San Francisco-based, medium-sized First Republic Bank, which operates mainly regionally. The bank’s share price has been in free fall since Monday, and whether the bank will survive the weekend is now highly questionable. It would become the third US bank to fail – after First Republic – Silicon Valley Bank (SVB) and Signature Bank. Five questions about the new turbulence.

1It was quiet again in banking land, wasn’t it?

Since the collapse of US banks SVB and Signature in early March, and the collapse of Swiss conglomerate Credit Suisse shortly after, banking unrest in the US and Europe actually seemed to have subsided. But emphasis was given to the common man. Without giving it too much publicity, customers have also been leaving First Republic in droves in recent weeks. In total, they took about $100 billion of the $200 billion they had withheld at the end of last year. This was evident when the bank was due to release its quarterly figures on Monday. After this announcement, there was panic among investors. Shares fell from around $16 on Monday to around $5.50 today.

2First Republic. Sounds like a familiar name.

beats Earlier there was unrest around the bank, which is one of the top fifteen banks in the US by total balance sheet ($200 billion) out of about 4,000 banks. A day after SVB went bankrupt, account holders lined up at First Republic to withdraw their money. But the bank was later helped by a consortium of America’s largest banks, including JP Morgan Chase, Bank of America, Citigroup and Wells Fargo. Together they stole $30 billion from the bank to assure other account holders that the First Republic was indeed “safe”.

It seemed to work at first. At least, the panic among investors has subsided. But behind the scenes, account holders kept canceling their balances, which was painful on Monday. Adding to the earlier turmoil, the original market value of the First Republic has now evaporated by 93 percent.

3What’s wrong with this sofa?

In essence, the same is happening here as before with SVB, although the two banks are not completely comparable. For example, First Republic was a more ‘normal’ bank than SVB, which mainly lent money to hip but risky tech companies in Silicon Valley. For example, First Republic lends to all types of companies like ING and APN Amro.

The agreement with SVB means that First Republic faces significant paper losses on investments as a result of rising interest rates. Those paper losses aren’t so bad. But if they turn out to be ‘real’ and the bank needs to sell the investments, for example if it needs money to pay out exiting account holders, this becomes problematic. Especially if a lot of investments are to be sold at once – as in recent months.

Read more This question is about the banking crisis.

The bank now has another problem. After the earlier panic, in addition to a helpline from the major banks, there was one from the government: the First Republic was allowed to borrow unlimited money from a special government counter so that there was always enough ‘liquidity’ to pay customers. runaway First Republic grabbed that helpline with both hands, but it came with a price tag: 4 percent interest on those loans.

At the same time, depositors walked out, often earning little or no interest. Due to this, the profitability of the bank has been further affected and it has become difficult to recover from the problem. For that reason, the bank announced a tough austerity program on Monday. For example, a quarter of the 7,200 employees will be laid off in the next two months.

But it remains to be seen if that will be enough, especially if investors and account holders can muster the patience to wait for that action. It didn’t help that First Republic’s CEO refused to answer questions from analysts while announcing bad news and austerity measures on Monday.

4Is this bank ok too?

However, American media reported that US officials are on high alert. First Republic itself said on Monday it was exploring other “strategic options” to avoid a catastrophic situation, including selling parts or selling the bank entirely. The latter path would also mean the end of the bank.

At the same time, there would be little enthusiasm for that at the moment, because no one in the First Republic wanted to burn their hands. Big banks that came to the rescue earlier were not too keen either. Their own $30 billion in deposits with First Republic aren’t even at risk now, because under the American Deposit Guarantee Program, up to $250,000 in assets are protected in the event of a bank bust. Some private equity investors would have shown interest, but the US government would not have been interested in being acquired by such an investment firm. He is wary of the image of profit-hungry, aggressive investors profiting from adversity.

There is now intense pressure on US officials to make a public announcement that First Republic account holders’ funds will be fully guaranteed as part of the bailout. The authorities had earlier done this at SVB and Signature, which would help restore calm. But the government prefers not to do that; Rules are there for a reason. Incidentally, US banks guarantee (all) assets, not the government. The deposit guarantee scheme was adapted for this purpose after the previous banking crisis. The idea is for banks to bail each other out in an emergency.

5 And is there a risk of ‘contamination’?

That remains to be seen, and for now it remains to be seen what will happen to the First Republic in the coming hours or days. US media report, based on anonymous sources, that the US government is not concerned about further contagion within the banking system. But what the authorities say makes sense: if they imply the opposite, they may fuel further unrest.

A key stock market index for regional US banks was 4 percent lower since Thursday afternoon (Dutch time) on the news of the republic. This is a sign of some anxiety, but not (yet) major panic. When SVB collapsed, the index collapsed much faster. European banks eased slightly from the panic. In the US, shares of other companies are also under some pressure, a sign that investors are not entirely at ease. . Rumors about Deutsche Bank were still buzzing in the European banking world after Credit Suisse’s collapse, but precisely because the bank reported its highest quarterly profit in a decade on Thursday.

A bank analyst said vs Financial Times: “I think a lot of investors see this as an isolated case. But at the same time: that being said, they’re looking over their shoulder to see if another bank has snuck up on them. The cockroach theory applies here: if you see one, there will be more.

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