- First Republic Bank has become the second large regional bank with assets over $200 billion to fail in just a few weeks.
- First Republic grew rapidly through deposits from wealthy individuals and companies. It used those deposits to make large loans, including jumbo mortgages.
- Once Silicon Valley Bank went under, clients pulled their money, fearful their deposits were in danger.
- First Republic said last week that depositors had withdrawn more than $100 billion.
- The large loans on First Republic’s books dropped in value as the Federal Reserve rapidly raised interest rates. So, if the bank tried to sell the loans to raise capital, it would do so at a loss.
- First Republic Bank also announced plans to lay off up to a quarter of its workforce, which totaled about 7,200 employees in late 2022.
First Republic Bank has become the second large regional bank with assets over $200 billion to fail in just a few weeks. Like Silicon Valley Bank, which was seized by the government on March 10, First Republic catered to a wealthy clientele, which helped it grow deposits rapidly but may have also contributed to its undoing. The bank’s business model left it susceptible to a sudden rise in interest rates.
Since the collapse of Silicon Valley Bank and Signature Bank the same weekend investors have wondered who’s next. First Republic quickly rose to the top of that list, but investors and analysts worried about banks such as Comerica and KeyCorp, which also had large numbers of accounts with deposits above the federally-insured level of $250,000.
First Republic grew rapidly through deposits from wealthy individuals and companies. It used those deposits to make large loans, including jumbo mortgages, when interest rates were at historically low levels in hopes of then convincing customers to expand into more profitable products like wealth management.
Many of the bank’s accounts had deposits well north of the federally-insured $250,000. Once Silicon Valley Bank went under, clients pulled their money, fearful their deposits were in danger. First Republic said last week that depositors had withdrawn more than $100 billion, most of it during a few days in mid-March.
What’s more, the large loans on First Republic’s books dropped in value as the Federal Reserve rapidly raised interest rates last year. So, if the bank tried to sell the loans to raise capital, it would do so at a loss. Similar circumstances had doomed Silicon Valley Bank.
First Republic planned to sell off unprofitable assets, including low-interest mortgages that it provided to wealthy clients. It also announced plans to lay off up to a quarter of its workforce, which totaled about 7,200 employees in late 2022. But those plans were seen as too little, too late, by analysts.
(With inputs from agencies)
