First Republic Bank’s stock closed down 50 percent Tuesday, a day after a troubling earnings report and a conference call with analysts in which the company’s executives refused questions. The speed of the decline set off a series of volatility-induced trading halts by the New York Stock Exchange.
On Monday, after the close of regular stock trading, First Republic released results that showed just how perilous the bank’s future had become since mid-March following the failure of Silicon Valley Bank and Signature Bank. First Republic said its clients pulled $102 billion in deposits in the first quarter — well over half the $176 billion it held at the end of last year.
The bank received a temporary $30 billion lifeline last month from the nation’s biggest banks to help shore up its business. Those banks, however, can withdraw their deposits as soon as July. In the first quarter, First Republic also borrowed $92 billion, mostly from the Federal Reserve and government-backed lending groups, essentially replacing its deposits with loans.
First Republic is considered the most vulnerable regional bank after the banking crisis in March. What happens to it could also affect investors’ confidence in other regional banks and the financial system more broadly.
The bank’s executives did little to establish confidence during its conference call, offering just 12 minutes of prepared remarks. The bank also said on Monday that it would cut as much as a quarter of its work force, and slash executive compensation by an unspecified sum.
“This is a trust issue, as it is for any bank, and when trust is lost, money will flee,” Aswath Damodaran, a finance professor at New York University, wrote in an email.
An analyst at Wolfe Research, Bill Carcache, laid out what he called “the long list of questions we weren’t allowed to ask” in a research note on Tuesday. Among them: How can the bank survive without raising new money, and how can it continue to provide attentive customer service — a staple of its reputation among wealthy clients — while cutting the very staff who provide it?
The bank’s options to save itself absent a government seizure or intervention are limited and challenging. No buyer has emerged for the bank in its entirety. Any bank or investor group interested in taking over the bank would have to take on First Republic’s loan portfolio, which could saddle the buyer with billions of dollars in losses based on the recent interest rate moves. The bank is also difficult to sell off in pieces because its customers use many different services like checking accounts, mortgages and wealth management.
There are no easy solutions for First Republic’s situation, said Kathryn Judge, a financial regulation expert at Columbia Law School. “If there were attractive options, they would have pursued them already,” Ms. Judge explained.
The Fed can no longer take on some of a bank’s financial risk to ease a takeover in the way it did in 2008, because reforms after the financial crisis changed its powers. And while the Federal Deposit Insurance Corporation might be able to help in some way, that would most likely involve failing the bank and invoking a “systemic risk exception,” which would require sign-off by officials across several agencies, Ms. Judge said.
Yet if the bank does fail, the government will have to decide whether to protect its uninsured depositors, which could also be a tough call, she said.
“There’s really no easy answer,” Ms. Judge said.
Representatives for the Fed and the F.D.I.C. declined to comment.
Shares of other banks also fell on Tuesday, though not nearly as much as First Republic. The KBW Bank Index, a proxy for the industry, closed down about 3.5 percent.
Separately, the Fed said on Tuesday that its review of the supervision and regulation of Silicon Valley Bank will be released at 11 a.m. on Friday.
Rob Copeland contributed reporting.
Source: New York Times
