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Tuesday, May 30, 2023

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First Republic Bank enters new free fall as concerns mount

Shares of First Republic Bank fell about 50% on Tuesday, a day after a disturbing earnings report and a conference call with analysts in which executives declined to ask questions. The speed of the drop triggered a series of volatility-induced trading halts on the New York Stock Exchange.

On Monday, after regular stock trading closed, First Republic reported results showing just how dangerous the bank’s future has become since mid-March. The bank said its customers withdrew $102 billion in deposits in the first quarter, far more than half of the $176 billion it held at the end of last year.

First Republic received a $30 billion temporary lifeline last month from the largest U.S. bank to help prop up its business. However, the banks can withdraw deposits as early as July. The First Republic also borrowed $92 billion in the first quarter, mostly from the Federal Reserve and government-backed lending syndicates, essentially replacing deposits with loans.

Executives at the bank did little to build confidence on the call, offering just 12 minutes of prepared remarks. The bank also said on Monday it would cut up to a quarter of its workforce and cut executive pay by an undisclosed amount.

“It’s a trust issue, as it is with any bank, and when trust is lost, money will flee,” he said. Aswath Damodaran, a finance professor at New York University, wrote in an email.

Bill Carcache, an analyst at Wolfe Research, laid out what he called “a long list of questions we’re not allowed to ask” in a research note Tuesday. Among them: how the bank can survive without raising new capital, and how it can continue to provide attentive customer service — a staple of its reputation with wealthy clients — while laying off staff.

In the absence of a government seizure, the bank’s options for bailing itself out are limited and challenging. The bank as a whole has yet to emerge as a buyer. Any bank or investment group interested in taking over the bank would have to accept First Republic’s loan portfolio, which could cost them billions of dollars based on recent interest rate moves. The bank would also be difficult to sell off because its customers use many different services, such as checking accounts, mortgages and wealth management.

Catherine Judge, an expert on financial regulation at Columbia Law School, said there are no easy solutions to the First Republic’s situation. “If there was an attractive option, they would have tried it long ago,” Ms Judge explained.

The Fed can no longer take on some of the financial risk of banks to ease takeovers, as it did in 2008, as post-financial crisis reforms changed its powers. While the FDIC could help in some way, that would likely involve letting banks fail and triggering a “systemic risk exception,” which would require sign-offs from officials at multiple agencies, Ms. Justice said.

However, if banks do fail, the government will have to decide whether to protect its uninsured depositors, which could also be a difficult decision, she said.

“There’s really no easy answer,” Ms Judge said.

Representatives for the Fed and FDIC declined to comment.

Rob Copeland Contribution report.

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