The life of the First Republic Bank hangs by a thread and time is running out. In various places in the United States, feverish consultations are ongoing to keep the bank afloat until recently. The only question is who does what: who steps in, other banks or the government? And who pays? Doing nothing is not an option, the banking crisis will not blow over on its own.
The US government is upset with this bank in distress. To save a bank or not is a moral dilemma. Banks should keep their own pants and not be helped out with tax money. But dropping a large bank causes a lot of damage, leads to a lot of financial suffering and a loss of confidence in the financial system.
So the Biden administration would prefer the financial sector to solve the problem. Other banks and financial parties are not unwilling to do so, but are weighing their financial risks.
So there are some calls and meetings at the headquarters of First Republic Bank in San Francisco and at the headquarters of several major banks, including giant JP Morgan, and with government agencies in Washington such as the Treasury Department, the central bank Federal Reserve (Fed) , and the bank balance regulator, the FDIC.
Uncertainty despite injection of billions
Founded in 1985, First Republic Bank is a relatively young privately held bank and asset manager, operating primarily in Los Angeles, San Francisco and New York City, with significant savings and mortgages for wealthy Americans. The bank has run into trouble due to problems at another California bank, Silicon Valley Bank, and has been weakened by a bank run and a collapsed stock price.
A week after the Silicon Valley troubles, 11 major U.S. banks — including major banks Bank of America, Citigroup and JPMorgan Chase — bailed out First Republic and poured $30 billion into the bank’s coffers in hopes of stabilizing the company. They were afraid that if First Republic collapses, other banks would also get into trouble, because of their mutual interests and ties.
Customers meanwhile massively withdrew their savings, according to First Republic in March already for 102 billion dollars. The First Republic’s stock price shrank, falling 95 percent from $122.50 on March 1 to $6.19 last Thursday.
The market capitalization of the bank is only $ 1.15 billion, compared to $ 22 billion at the beginning of March. Not only a drama for the shareholders, but also for the bank itself because the equity is shrinking almost as fast, which exacerbates the financial problems.
Taking over First Republic costs a lot of money. First Republic’s equity has shrunk, the bank’s assets have fallen in value. So to keep the bank afloat, tens of billions must be added.
Banks would therefore ideally like the regulator to provide financial support by guaranteeing the savings, as they did with the rescue of the Silicon Valley Bank, which was eventually taken over by First Citizens Bank.
Talks about a rescue have been going on for a few weeks and have only intensified in recent days. The idea seems to be to come out next weekend. The financial markets will then be closed and will therefore not act as a disturbance.
The fact that a until recently solid and well-functioning bank is emptied and discarded in a short time is a bad sign for financial stability. Apparently, banks are no match for suddenly appearing doubts, a bank run and fleeing investors, no matter how big and healthy a bank is.
What is particularly bothering First Republic is the rising interest rate. The bank has many and often high mortgages and loans at very low interest rates in its portfolio. Due to the higher interest rates, the collateral of those loans, usually bonds, is now worth less and therefore counts less for the financial buffers.
On top of that comes the loss of more than $100 billion in savings and the falling stock price. All in all, the First Republic is forcing it to raise extra capital, but borrowing money costs money and the question is who is still willing to lend to a bank in need.
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