After nearly four decades of First Republic becoming a lender to the California elite, its executive chairman Jim Herbert was forced to take a leave of absence at the end of 2021 to recover from heart disease.
The Ohio native founded the bank in 1985 with $8 million, a handful of employees, and a straightforward conviction: «Provide exceptional customer service and growth will follow.»
It was this silver service that attracted wealthy clients and their cash, helping Herbert turn a regional lender into a $212 billion giant by the time he retired in 2022. By the time he retired, First Republic was fourteenth largest bank in the US.
However, the events that have followed the 79-year-old's departure just over a year ago have put the First Republic in the balance and raised serious questions about the health and stability of the US banking system as a whole. .
The lender's shares fell 25% on Wednesday after falling nearly 50% on Tuesday. Shares have fallen 95% this year, leaving bosses scrambling to make a deal to save the beleaguered company.
The catalyst for the crisis in the First Republic was the collapse of Silicon Valley Bank (SVB) last month. , which went bust after large bets on long-term bonds fell through due to higher interest rates.
The demise of SVB raised fears of contagion and prompted customers to borrow cash from smaller regional lenders over fears that their money is no longer safe.
2704 small banks were shrinking fast
First Republic was targeted in part because of the high proportion of its customers with balances in excess of $250,000 after which they were no longer federally insured. Wealthy clients have begun withdrawing funds en masse.
The scale of the churn was revealed late Monday when First Republic said it had lost more than $100 billion in deposits in the first three months of the year, much more than forecast analysts.
Investors disagreed on the number that triggered the bank's downward spiral this week.
Will the First Republic issues cause new contagion in the US banking industry?
Early signs indicate that investors are not as concerned about similar problems arising from rivals. PacWest stock, which was in the spotlight last month, surged Wednesday after the company said deposits had stabilized following a sharp withdrawal in March.
Gary Greenwood, banking analyst at Shore Capital, said: «I think First Republic, SVB and Signature [another US bank that went bankrupt last month] had some problems that contributed to their decline.
«The aforementioned three have all suffered from a crisis of confidence and it's easy to see that once the rot starts, it's very hard to stop. The fact that the US banking system is so fragmented and it's so easy to move money means these things pick up steam easily.» when they start to go wrong.
«However, there are many small banks in the US, and it would be foolish of me to assume that there are no others to be concerned about.» Spare capacity in recent months at almost 5%. Given the high borrowing costs, one might assume that other banks were desperate for cash.
Last month, federal officials said banks across the US were experiencing $620 billion in unrealized losses — in other words, investments that have been worthless but have not yet been sold. Unwinding these positions will be painful.
The future of the First Republic remains uncertain. Between January and March, the bank used nearly $80 billion in emergency federal funds to bolster its balance sheet. Interest payments will be high.
U.S. regulators, Wall Street giants and would-be bidders for First Republic's assets were outraged Wednesday that advisers had identified potential buyers for new shares as part of a bailout plan for a beleaguered lender.
Greenwood says: «Authorities and others in the industry trying to provide support are only adding fuel to the fire. They give the impression that «well, if they have to interfere, then there is something to worry about.»
Depositors simply don't need the hassle of participating in any bank that might fail, and it's just easier for them to move their money elsewhere. Nobody really wants to rely on deposit insurance to get their money back.”
This raises the question of whether U.S. regulators should allow the First Republic to shut down quickly, rather than prolong investor uncertainty
Bank executives have turned their anger on regulators over the effects of the SVB, and Bill Winters, head Standard Chartered, said on Wednesday they failed to prepare for the crisis.
2,704 deposits
He said: «I'm pretty sure as we look back over the last couple of months that moral hazard concerns are higher, not lower, due to the unpreparedness of regulators around the world to deal with a crisis of confidence.»
He added that central banks should reconsider the way they provide liquidity to the market, saying that it has been «very uncertain» in the crisis.
Winters said: «The likelihood of a bad regulatory outcome has been would be reduced if there was clarity about the liquidity that central banks would provide against acceptable collateral before the crisis.”
The problems in the First Republic raise a question. the possibility that the Federal Reserve may decide to put a hold on interest rate hikes next week.
Analysts at Evercore say: perhaps a substantial amount of credit tightening to come.”
In January of this year, Herbert told First Republic investors that customer satisfaction with the lender had reached an all-time high. These once-happy customers are now threatening to bring down the business Herbert built from scratch 38 years ago.
Earlier this week, Mike Roffler, chief executive of First Republic, said: difficulties and uncertainties with the stabilization of our deposit base and the stability of our credit quality and capital, we continue to take steps to strengthen our business.”
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