Since the collapse of Silicon Valley Bank (SVB) in March 2023, concerns about the health of the US banking system and a possible repeat of the 2008 financial crisis have been the major headlines. In particular, the focus has been on First Republic Bank (FRC) as the weakest link in the US banking sector. Like SVB, which catered to technology startups, FRC was also a California-based lender which focused on serving wealthy Americans with low-rate mortgages in exchange for cash…..CONTINUE READING...CONTINUE READING
However, events took a different turn as the Federal Reserve, “the Fed”, began hiking the benchmark interest rate in 2022 in response to rising inflationary pressure within the country. This led to losses in FRC’s assets, a decline in customer deposits and an erosion of confidence in the bank. As a result, the Federal Deposit Insurance Corporation (FDIC) closed the bank, while JP Morgan acquired the bank’s assets and deposits. This makes it the second-largest bank to fail in the US banking system history.
For context, the three regional banks that have collapsed shared similar business models that did not adapt well to changes in macroeconomic conditions and rising interest rates. Yet, while the SVB’s problem was its stock of long-term debt securities whose rates were incredibly low, First Republic’s issues were more on its loan portfolio.
The bank’s system of providing cheap mortgages to wealthy customers turned sour as interest rates climbed rapidly in 2022, thus, resulting in a lesser value for the mortgages held in the bank’s balance sheets. On the funding side, the bank recorded a 57.8% q/q decline in customer deposits, printing at $74.5bn Q1-2023 from $176.4bn in Q4-2022. This is due to customers moving their funds to fixed-income instruments with attractive rates.
The collapse of First Republic Bank (FRC) makes it the third bank to be shuttered by regulators since the failure of Silicon Valley Bank (SVB) and Signature Bank. The recent Bank Term Funding Program (BTFP) to shore up banks’ liquidity has proved deficient in suppressing investors’ fears and the volatility in the banking system.
This underlines the need for stakeholders in the banking system (managers, boards, and regulators) to find more flexible and swift ways to spot risks that may bubble up suddenly from changes in the trading environment. That said, we expect the Fed to slow the pace of its rate hikes to protect the fragile market…..CONTINUE READING
