Investors
have been speculating about the possibility of another bank failing since
Silicon Valley Bank and Signature Bank collapsed on the same weekend.
Unfortunately, First Republic Bank, which also targeted affluent customers and
experienced rapid deposit growth, has become the second large regional bank
with assets exceeding $200 billion to fail within a few weeks. Similar to
Silicon Valley Bank, First Republic's business model made it vulnerable to a
sudden spike in interest rates.
First Republic experienced
rapid growth in deposits from affluent individuals and companies. The bank
utilized these deposits to issue large loans, including jumbo mortgages, during
a period of historically low-interest rates. The intention was to persuade
customers to diversify into more lucrative services such as wealth management.
Most of the bank's accounts held deposits above the federally-insured $250,000
limit. However, following the collapse of Silicon Valley Bank, clients became
apprehensive and withdrew their deposits. First Republic reported that
depositors had taken out over $100 billion, with the majority being withdrawn
in mid-March. As the Federal Reserve raised interest rates rapidly last year,
the value of the bank's large loans declined. Therefore, any attempt to sell
them to raise capital would result in a loss. These circumstances mirrored
those that led to the downfall of Silicon Valley Bank. By mid-last week, it was
evident that government intervention in First Republic was necessary. Treasury
officials solicited bids for First Republic from banks, and regulators and
bankers collaborated throughout the weekend to devise a resolution.
Do we expect another bank to collapse?
Fortunately, analysts do not
anticipate any further significant bank failures at this time, as the issues
faced by Silicon Valley Bank, Signature Bank, and First Republic were specific
to those institutions. Although some mid-sized banks faced significant deposit
withdrawals and had to borrow from federal programs to stabilize their balance
sheets, none were hit as severely as First Republic. For instance, Comerica,
located in Dallas, lost $3.7 billion in deposits after March 9 and borrowed $13
billion from federal programs to maintain a buffer beyond regular operating
levels. Despite this, the company earned $324 million in Q1, slightly less than
in Q4, but up from $189 million in the same period the previous year.
First Republic aimed to sell off unprofitable assets, such as
low-interest mortgages provided to affluent clients, and to reduce its
workforce by up to 25%, which numbered around 7,200 employees at the end of
2022. However, these initiatives were deemed insufficient by analysts.
Following the collapse of Silicon Valley Bank, Comerica's shares dropped by 37%
but have since stabilized. Although most mid-sized banks experienced a decline
in their shares on Monday, the losses were relatively minor compared to the
significant double-digit declines that occurred on March 13.