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Is First Republic Bank In Trouble?

Is First Republic Bank In Trouble?

First Republic witnesses massive swings in stock price as customer confidence evaporates. On Monday the stock plunged 70%. However, after President Biden assured all banks were backed up, the shares recovered some as a result.

So what is going on with First Republic?

Worries about First Republic’s solvency reverberated through social media this weekend. Now that SVB‘s balance sheet issues and subsequent bank run caused a spotlight to shine on all of the unhealthy banks in America, First Republic finds itself in the regrettable position of being on the proverbial ‘bank hot seat’. Let’s also not forget about Silvergate’s demise earlier this week. This is the season of dying banks!

According to a Wall Street Journal article:

“In its an­nual re­port, First Re­pub­lic said the fair-mar­ket value of its “real es­tate se­cured mort­gages” was $117.5 bil­lion as of Dec. 31, or $19.3 bil­lion be­low their $136.8 bil­lion bal­ance-sheet value. The fair-value gap for that sin­gle as­set cat­e­gory was larger than First Re­pub­lic’s $17.4 bil­lion of to­tal eq­uity.”

However, how bad is the situation?

Below we have a chart showing unrealized depreciation on Hold to Maturity Securities (HTM) for top 100 banks versus equity. 

These unrealized losses are NOT reflected in profits or a deduct to equity via Other Comprehensive Income (OCI) – only in the footnotes! Moreover, we don’t find these losses reflected in stress tests or measures of capital adequacy. 

Furthermore a 25 bp (1/4 of 1 percent) increase in rates for a 10-year security causes approximately 2 points in losses (100 par to 98 to reflect yield discount). 

Now we see actual bank runs occurring in Brentwood California. Lines around the block for worried customers hoping to access their accounts:

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Is my money Safe in Schwab? Charles Schwab Bank Run

Will Wells Fargo Fail?

Of course First Republic is doing their best to reassure customers. Releasing an 8-k on their financial health:

Microsoft Word – FRB Form 8-K_2023 03 10_v4.docx (firstrepublic.com)

The challenge, however, is that market hysteria can drown out rationality.

Moreover, First Republic actually offers insurance greater than $250k:

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Balances held in an ICS account are divided into FDIC insurable increments of less than $250K, and each increment is allocated to a different bank, enabled by the Promontory network of banks.

With the sweep, you can insure up to $160M!

Why is Silicon Valley Bank crashing?

Is SVB Systemic?

Credit Suisse Bank Run?

Can A Central Bank Run Out Of Money?

First Republic Bank is a private bank and wealth management company that was founded in San Francisco, California in 1985. The bank was established by Jim Herbert and others, who sought to create a new kind of banking experience that focused on personalized service and relationships with clients.

In its early years, First Republic Bank served primarily high net worth individuals and businesses in the San Francisco Bay Area.

Offering a range of services such as private banking, business banking, and real estate lending. The bank quickly gained a reputation for exceptional customer service and personalized attention. As a result, helping it grow rapidly in the years that followed.

During the 1990s and 2000s, First Republic Bank expanded beyond the Bay Area.

Opening branches in other major cities such as New York, Los Angeles, and Boston. The bank continued to focus on serving high net worth individuals and businesses, offering a range of services such as wealth management, investment management, trust and estate services, and mortgage lending.

In 2007, First Republic Bank was acquired by Merrill Lynch, which was itself later acquired by Bank of America. However, in 2010, a group of investors led by Jim Herbert and others acquired First Republic Bank back from Bank of America. Taking it private once again.

In conclusion, today, First Republic Bank continues to operate as a private bank and wealth management company, with a focus on serving high net worth individuals, businesses, and nonprofits. Laslty, the bank has expanded its offerings to include services such as student loan refinancing and personal lending.

Is Wells Fargo Bank In Trouble?

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That’s the question of the day. Will one of the great American banks face demise for purchasing too much debt at the height of the recent bond bubble. And of course, not hedging that debt with proper risk management. Similar to Silicon Valley Bank. See our piece: What caused the run on Silicon Valley Bank?

Lately all we can read about these days are banks failing everywhere! Now some worry Will Bank of America Collapse? And many others worry whether or not there is a Hawaii Bank Run? And of course, many others worry about the more local establishments. Will First Republic Bank Fail ?

Now Wells Fargo finds itself in the hot seat.

Which surprises few in the financial world. As the bank has a history of lax risk management practices. They were the ones creating fake accounts in people’s names to pad their numbers. Their CEO 15 years ago was great, but he became forced out sadly and since they have been going downhill steadily from an image standpoint.

Below we have a chart showing unrealized depreciation on Hold to Maturity Securities (HTM) for top 100 banks versus equity. 

These unrealized losses are NOT reflected in profits or a deduct to equity via Other Comprehensive Income (OCI) – only in the footnotes! Moreover, we don’t find these losses reflected in stress tests or measures of capital adequacy. 

Furthermore a 25 bp (1/4 of 1 percent) increase in rates for a 10-year security causes approximately 2 points in losses (100 par to 98 to reflect yield discount). 

Wells sits awash in net unrealized losses, see chart:

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Will Bank of America Collapse?

Let’s look at their long and complex history!

The company was founded in 1852 by Henry Wells and William Fargo, both of whom had experience in the transportation industry. Initially, the company was called Wells, Fargo & Company and focused on providing express delivery services to customers in California.

During the California Gold Rush, Wells Fargo played a key role in transporting gold and other valuable items across the country. In addition to its express delivery services, the company also began offering banking and other financial services to its customers.

In the late 19th and early 20th centuries, Wells Fargo became a major player in the banking industry, furthermore, opening branches across the United States and acquiring other banks and financial institutions. However, the company also faced numerous scandals and controversies, including accusations of predatory lending practices and discriminatory treatment of customers.

In the aftermath of the 2008 financial crisis, Wells Fargo faced additional scrutiny over its business practices.

Wells Fargo to pay $148 million fine for Wachovia misdeeds – Dec. 8, 2011 (cnn.com)

Wells Fargo to pay $175 million in race discrimination probe | Reuters

Furthermore, in 2016, the company became fined $185 million for opening millions of unauthorized accounts on behalf of its customers. As a result, leading to the resignation of its CEO and other senior executives.

Then in 2018, Wells Fargo faces $1 billion fine from loan abuses | Reuters

Just in December, Wells Fargo to pay $3.7 billion settlement over latest allegations of “illegal activity” – CBS News!

Ex-Wells Fargo leaders personally face $59 million in fines – Los Angeles Times (latimes.com)

Despite these challenges, Wells Fargo remains one of the largest and most influential financial services companies in the world. With operations in more than 40 countries and over 250,000 employees.

Wells Fargo to Pay $37M to Settle Fraud Lawsuit | ThinkAdvisor

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Is First Republic Bank In Trouble?