First Republic Bank teeters on collapse as regulators circle troubled lender
The Federal Deposit Insurance Corporation is set to seize control of First Republic Bank, according to multiple reports.
Shares of the ailing regional bank cratered on Friday following a CNBC report that it is likely to be seized by federal financial regulators, putting it in jeopardy of becoming the third bank to collapse since Silicon Valley and Signature Bank failed last month. FDIC officials think First Republic is out of time to arrange a rescue involving other banks, leaving the agency no choice but to take the bank into receivership, Reuters reported.
Also read: Federal Reserve report blames Silicon Valley Bank execs - and itself - for bank's collapse
"Receivership is basically the FDIC coming in and handling all the affairs of a failed bank. It's selling the assets of the bank to then meet the obligations of the bank, such as for example, the people who have $250,000 or less deposited," said Dr. Julian Vogel, an assistant professor of finance at San Jose State University.
Vogel explained when the Fed raised interest rates, the value of some of First Republic's assets went down, and the bank was faced with less money on its balance sheet. As a result, some people panicked because of what happened with SVB. Those concerns ultimately led to the mass withdrawal of funds from First Republic.
"When more people withdraw their money, that's when the bank is more likely to go under," he said. "However, these banks that are affected also had an issue with their management – they didn't diversify enough, they invested an unproportionately large amount of their assets in risk-free treasury securities, and that is never ideal. Being overexposed to any specific type of security or asset is never ideal. I say risk-free because treasury securities are generally touted as being risk-free. They're just susceptible to one risk, and that is interest rate risk, which is exactly the risk we're seeing right now – the risk of having to mark them down based on increased interest rates by the Fed."
Looking at the big picture, Vogel says it's not easy to forecast how everything will play out.
"It's hard to say. But, I don't think at this moment that we're in for a repeat of 2008," he said.
First Republic's stock price, which topped $200 as recently as 2021, plunged 43% on Friday and continued to sink in after-hours trading. The shares have fallen 97% this year.
Investors were spooked earlier this week by the San Francisco bank's disclosure that depositors withdrew more than $100 billion during last month's crisis, raising concerns about First Republic's stability. The fund outflows were "unprecedented," bank executives said on an earnings call Monday.
As with Silicon Valley, a significant share of First Republic's deposits were uninsured, which makes it more prone to withdrawals from skittish customers.
The troubled bank, which had roughly $233 billion in assets under management as of March 31, said it now plans to sell off assets and restructure its balance sheet, as well as lay off as much as a quarter of its workforce, which totaled about 7,200 employees at the end of 2022. The bank will also shrink its corporate office footprint, cut executives' compensation by a "significant" amount and eliminate "nonessential" projects, executives said Monday.
In a rare move, 11 of the nation's largest financial institutions gave First Republic $30 billion in deposits last month to prop up the troubled bank.
Silicon Valley Bank, at the time the 16th-largest U.S. bank with $210 billion in assets, was taken over by state regulators in March after concerns about potential losses spurred many depositors to withdraw their funds. New York's Signature Bank failed only days later after a similar bank run.
In a self-critical report on Friday, the Federal Reserve attributed SVB's startling collapse to a combination of extremely poor bank management, weakened regulations and lax government supervision.
