What Led To The Downfall Of The First Republic Bank?

1st May 2023 saw the downfall of the third major US Financial Institution, First Republic Bank This event occurred shortly after the collapse of two other regional banks, Silicon Valley Bank and Signature Bank, both of which had significant amounts of uninsured deposits.

The bank’s assets were seized by federal regulators after experiencing a run on deposits. And most of its business was sold to JPMorgan Chase. As a result of the seizure, FRB became the second-largest bank failure in U.S. history.

A regional bank headquartered in San Francisco, First Republic Bank primarily served high-net-worth clients. The bank closed in 2023 and was acquired by JPMorgan Chase.

One of the main factors contributing to its failure was that a significant proportion of its deposits exceeded the limit for coverage by the Federal Deposit Insurance Corp. (FDIC).

Depositors' funds are generally protected by the FDIC for up to $250,000 per account holder, per account type, in case a bank fails. However, any amount over that limit is usually not covered by the FDIC.

According to S&P Global Market Intelligence data analysis in December 2022, 67.4% of First Republic's deposits were uninsured. The collapse of two other regional banks, Silicon Valley Bank and Signature Bank, raised concerns among First Republic's customers with uninsured funds, which led to a run on deposits.

At the time of its collapse, First Republic had $103.9 billion in deposits and $229.1 billion in assets. JPMorgan Chase acquired most of its assets and rebranded 84 branches in eight states, which opened on May 1, 2023. As a result, First Republic's customers experienced uninterrupted service, and their funds, including uninsured deposits, were safe.

The demise of First Republic Bank marked the third bank failure in 2023, along with Silicon Valley Bank and Signature Bank, according to the Federal Reserve's failed bank list.

The combined assets of the three banks totalled $548.5 billion, which exceeded the total assets of all the failed banks in 2008, the height of the financial crisis.

First Republic Bank offered personalised banking services through its "First Republic Relationship Manager" to its clients, with a focus on private banking, private wealth management, and private business banking. 

Private Banking and Private Wealth Management Services

The services included a range of lending and account options, such as mortgages, personal loans, checking, savings, and CDs. Private wealth management services offered investment management, financial planning, foreign exchange, trust administration and custody, as well as brokerage and insurance services.

Private Business Banking

The bank's private business banking services catered to specific industries such as venture capital, private equity funds, hedge funds, investment management firms, property management, real estate investors, private clubs, independent schools, medical practices, and wineries.

These services included personalized business banking and lending options tailored to the needs of each industry.

Established in 1985 by James H. Herbert in San Francisco, First Republic Bank primarily offered jumbo mortgages, CDs, and savings accounts. The bank specialised in lending for luxury homes, second homes, condos, co-ops, and investment properties.

In the late 1990s, First Republic expanded its offerings and markets on both the West and East Coasts, transforming into a full-service bank. It continued to focus on providing personalised service to a select number of high-net-worth clients.

In 2007, First Republic merged with Merrill Lynch, which was subsequently acquired by Bank of America in 2008. However, in 2010, Herbert led a group of investors to buy back First Republic and secured regulatory approval for the acquisition.

Between 2018 and 2021, First Republic experienced significant growth, with its deposits more than doubling to $156 billion.

Like Silicon Valley Bank and Signature Bank, First Republic Bank faced financial difficulties stemming from the high amount of uninsured deposits it held, along with liquidity issues. Additionally, investor concerns about the stability of regional banks contributed to the bank's failure.

Uninsured deposits: More than 67% of First Republic Bank's deposits were uninsured as of December 2022, which can contribute to a bank run when investors start to panic.

Lack of liquidity: The primary income source for First Republic Bank's net interest income from loans and investment securities.

However, many of its investments were in less liquid real estate loans and municipal securities that were not earning competitive interest rates. It also had the highest ratio of loans and securities to uninsured deposits.

Downgraded Credit Ratings: First Republic Bank received multiple credit rating downgrades as credit agencies expressed doubts that the bank's efforts to improve its liquidity, funding, and profitability would be sufficient to address its ongoing challenges.

Mistrust in regional banks: The collapses of Silicon Valley Bank and Signature Bank, along with credit rating downgrades, contributed to increasing concerns among investors about holding uninsured deposits with regional banks like First Republic Bank.

Due to a decline in deposits following the failures of Silicon Valley Bank and Signature Bank, First Republic Bank turned to the Federal Home Loan Bank Board and Federal Reserve for borrowing and received a $30 billion cash infusion from a group of 11 banks.

As a result of these actions, coupled with its credit ratings downgrades and other challenges, First Republic's share price experienced a sharp drop from $122.50 on March 1, 2023, to $3.51 on April 28.

December 31, 2022: Despite meeting all capital ratio requirements to be considered "well-capitalized", First Republic Bank had already borrowed $14 billion from the Federal Home Loan Bank Board (FHLB).

February 28, 2023: First Republic Bank's annual report in February 2023 identified several challenges, including a loan portfolio that was primarily secured by real estate and heavily concentrated in California and the San Francisco Bay Area.

The report also noted that the bank was experiencing a rapid migration of deposits to higher-yielding products and asset classes due to rising interest rates.

March 6: First Republic Bank experienced a rapid and significant decline in its stock price, dropping by more than 75% in a short period and failing to recover thereafter.

March 10: After the FDIC closed Silicon Valley Bank, First Republic Bank faced an unprecedented level of deposit outflows.

March 12: Signature Bank was closed by the FDIC.

March 15-17: Multiple credit rating agencies downgraded First Republic Bank's credit rating, indicating a lack of confidence in the bank.

March 16: Eleven banks contributed $30 billion in uninsured deposits to increase First Republic Bank's liquidity.

March 31: First Republic Bank had obtained $105.4 billion in funding from the Federal Reserve and the Federal Home Loan Bank Board (FHLB).

April 24: First Republic Bank announced cost-cutting measures, including a reduction of up to 25% in its workforce, after experiencing a significant decline in deposits of nearly 41% since December 2022. The bank's financial position had become precarious, and it was at risk of collapse.

April 28: With $121.3 billion in outstanding borrowings from the Federal Reserve and FHLB funds, First Republic Bank was unable to secure additional funding. As a result, news outlets reported that the FDIC was making arrangements to find buyers for the bank.

May 1: A significant majority of First Republic Bank's assets were acquired by JPMorgan Chase.

Following the acquisition by JPMorgan Chase, customers of First Republic Bank experienced uninterrupted service, and their funds were ultimately secure.

The plan as of May 5, 2023, was to gradually transfer First Republic's operations and platforms to JPMorgan Chase's technology.

Some of the bank's branches were expected to be converted into J.P. Morgan wealth centres, and its private wealth management platform was scheduled to merge with J.P. Morgan Advisors.

In early 2023, First Republic Bank was one of the few regional banks that failed due to bank runs, which were driven in part by the large volume of uninsured deposits that the bank held, along with financial struggles caused by the broader interest rate environment.

To safeguard your funds, it's advisable to maintain an amount under the minimum FDIC insurance limit of $250,000 in your bank account. If you need to deposit more than that, you may consider opening another account at a different bank.

A financial advisor can offer more guidance on how to distribute your money based on your individual circumstances.