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First Republic Bank on the brink

Tonhis central ego Most zombie movies, like 28 Days Later, which is set in post-apocalyptic London, feature a terrifying disease that has spread. It has transformed large numbers of healthy people into dangerous monsters. These walking dead now roam the land: from a distance, it’s hard to tell if they’re alive or not. From the collapse of Silicon Valley Bank to a little over 28 days (SVB) and First Republic Bank’s first-quarter earnings on April 24 (about 45 earnings to be exact), but the earnings clearly show that there’s at least one institution in the U.S. banking industry that’s walking dead.

By the end of 2022, the First Republic held $213 billion in assets, with about $167 billion in loans and $32 billion in bonds. It is funded by $176 billion in deposits, $7 billion in short-term funds and $9 billion in long-term funds. The bank also has $18 billion in high-quality capital. By the end of the first quarter, the company had lost $102 billion in original deposits. In its place has been massive short-term borrowing, which climbed to $80 billion by the end of the first quarter, and $30 billion in savings deposits from six big banks, which have parked money with the institution, providing it with a lifeline.

There are several problems with this photo. The first was that the First Republic lent a lot of money when interest rates were low, including through low-interest mortgages. Mark Zuckerberg was supposed to take out a 30-year mortgage on his $6 million Palo Alto home at 1.05%. As interest rates rise, the value of such loans will plummet.

The second is the deal with many wealthy clients that they agree to transfer their deposits to the bank as well. But those clients, with large holdings unprotected by regulators, have now fled. Without cheap deposit money, the First Republic turned to short-term financing—most of which was provided at market rates by the Federal Reserve and another government-backed lender, the Federal Home Loan Bank. That may have undermined its ability to turn a profit.

In the final quarter of 2022, First Republic earned a 2.5% net interest margin — the difference between what it collected on loans and what it paid for financing. It fell to 1.8% in the first quarter. However, the reality could be worse.After all, the first quarter includes two months ago SVB Implosion, which meant that First Republic’s net interest in March was almost zero. In other words, the bank pays as much for financing as it receives for the loan.

Unless the depositors agreed to return, there was no obvious way out for the First Republic. It can’t get out of the woods because net interest margins have collapsed. Selling assets doesn’t help either. Imagine a 10-15% decline in the book value of its loans in 2022, less than the decline in value of most medium- and long-term government bonds. This means that if First Republic sells these assets, all of its equity will be wiped out. A recapitalization would be a solution, but investors don’t seem keen. The bank’s share price plummeted 50% on April 25. Its market capitalization is now $1.2 billion, down from $23 billion in January.that left SVB-Style closure: First Republic is reportedly in talks with regulators.

How many zombies are there out there?A paper published in March by USC’s Erica Jiang and co-authors modeled what might happen if half of all depositors were uninsured — the type that fell SVB The First Republic may soon collapse – take their money out of the banking system. The bad news is that about 190 (unidentified) institutions have negative equity. Even better news, they are likely to be smaller institutions, as their combined assets are $300 billion. If that number includes First Republic, it suggests that bigger and scarier zombies might not be lurking around the corner. Still, another jump scare seems unlikely.

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