First Republic Bank on the Brink: FDIC Prepares to Seize and Sell Troubled Lender

First Republic Bank on the Brink: FDIC Prepares to Seize and Sell Troubled Lender
First Republic is fading fast

Key Takeaways:

  • The Federal Deposit Insurance Corp. is considering taking over First Republic Bank and facilitating a sale after a $100 billion deposit withdrawal severely impacted the bank's business model.
  • First Republic Bank's business model was built around gathering big deposits from wealthy customers and offering low-interest mortgages to them. However, the strategy failed after the Federal Reserve raised interest rates to control inflation, causing concern about exceeding the FDIC deposit insurance limit of $250,000 and leading to a deposit run.
  • As a result, the bank had to fill the deposit hole with expensive loans from the Federal Reserve and Federal Home Loan Bank, causing its stock to drop by nearly 50% in a day. This is the fourth bank failure in recent months, likely due to the mismatch between long-term assets held by banks and the volatile deposit base.

What is happening:

The Wall Street Journal is reporting that the Federal Deposit Insurance Corp. is currently evaluating offers for First Republic Bank, and is preparing to take over the bank to facilitate a sale. This comes in the aftermath of a $100 billion deposit withdrawal, which severely impacted the bank's business model.

First Republic Bank's business model was to gather big deposits from rich customers and offer low-interest mortgages to them. However, the strategy started failing after the Federal Reserve raised rates to control inflation. As depositors had higher yielding alternatives and concern started to spread about deposit that exceeded the FDIC deposit insurance limit of $250,000. Last month, a deposit run caused the bank to receive a $30 billion deposit from JPMorgan and other big banks. The bank hired outside advisers to stabilize its finances, but investors were not willing to put money into the bank without government support. As a result, First Republic had to fill the deposit hole with expensive loans from the Federal Reserve and Federal Home Loan Bank. The bank's stock dropped nearly 50% in a day and continued to fall throughout the week, closing at $3.51 a share on Friday.

Our Take:

In the past few months, four banks including Silicon Valley Bank, Signature Bank, Silvergate, and Credit Suisse have failed. The rise in interest rates over the last year has put many community and regional banks in a disadvantageous position. This is due to the mismatch created between long-term assets held by banks and the volatile deposit base, especially when considering instant withdrawal access through smartphones that can create devastating electronic bank runs. Given the current environment it is unlikely that First Republic will be the last bank failure in 2023.