What is First Republic Bank and why it can collapse

US private lender First Republic Bank, the country’s 14th largest bank, is reportedly exploring strategic options including a sale. This comes after the collapse of Silicon Valley Bank (SVB) and Signature Bank that gave rise to fears of a bank contagion. 

First Republic Bank, according to a report in Bloomberg, is weighing options to shore up its liquidity and is expected to draw interest from larger rivals. 

The lender, founded in 1985, is known for its private banking and private business banking services. It also has wealth management affiliates that offer investment and wealth management services. 

Also read: First Republic Bank weighing options including sale following ratings downgrade 

FIRST REPUBLIC’S CRISIS

The bank’s rating was downgraded by Fitch and S&P on Wednesday, citing risks to its funding and liquidity. Share of the bank slumped on fears of a bank contagion. 

Fitch downgraded First Republic Bank to ‘BB’, and placed it on negative watch. It said that First Republic’s deposit concentrations were viewed as a rating weakness. The rating agency said that First Republic’s funding and liquidity profile has changed and represents a “weakest link” relative to other rating factors. 

The agency said that its rating action reflects its revised view of First Republic’s funding and liquidity profile in the current environment. It also added that a negative watch indicates the probability of further ratings downgrade for First Republic. 

Similarly, ratings agency S&P Global Ratings also placed First Republic’s ratings on CreditWatch negative, reflecting lower confidence in the lender's financial strength.

Meanwhile, reports stated that the White House is carefully monitoring development at First Republic, and other smaller banks following the collapse of Silicon Valley Bank and Signature Bank. 

A senior White House official, when asked if there is still danger of runs on other banks, said that the banking system was in "a vastly better position right now" than if the actions had not been taken, and depositors should have confidence their funds would be protected.

Also read: Credit Suisse to borrow up to $54 bln as it seeks to calm investor fears

The White House official also said that they are keeping a close watch on any outflows of money to larger banks, and remain committed to ensuring robust competition in the banking sector.

Another report stated that the bank spoke to at least one private equity firm about raising capital before securing financing from JPMorgan and Chase, and before the US authorities intervened with its assistance for the industry.

First Republic said on Sunday night it had secured additional financing through JPMorgan, giving it access to a total of $70 billion in funds through various sources. The additional borrowing capacity from the Fed as well as that from JPMorgan had boosted the amount of liquidity it had available.

About 70 per cent of its deposits are uninsured, above the median of 55 per cent for medium-sized banks and the third highest in the group after Silicon Valley Bank and Signature Bank, according to a Bank of America note.

BANKING SECTOR

US-based Silicon Valley Bank and Signature Bank collapsed at a breakneck speed last weekend. This happened as too many depositors withdrew their funds from these banks at the same time. 

SVB was taken over by banking regulators on Friday last week – an eventual fallout of the US Federal Reserve raising interest rates to fight inflation. Investors’ appetite for risk shrinks if money available to them becomes more expensive. 

Also read: ‘Credit Suisse too big to be saved, bad things can happen,’ warns Nouriel Roubini, who predicted 2008 financial crisis

The market for initial public offerings shut down due to higher interest rates, making fundraising for startups to become more costly. Customers of Silicon Valley Bank that largely focuses on tech startups, began pulling money out due to liquidity needs. 

As SVB looked to meet its customer withdrawals, it sold a $21 billion bond portfolio, bearing a loss of $1.8 billion. In order to raise capital, SVB announced the sale of $2.25 billion common equity and preferred convertible stock, plunging its shares by 60 per cent. Its clients pulled their money from the bank, spooking investors SVB had lined up for investments. 

As it looked for alternative funding, including sale of the company, Federal Deposit Insurance Corporation (FDIC) placed the lender under receivership. 

Two days later, Signature Bank was also shuttered down by the FDIC. 

Meanwhile in Europe, global stresses about the banking sector, Credit Suisse tumbled to a new low. Credit Suisse said on Thursday that it would borrow up to $54 billion from the Swiss central bank to shore up liquidity and investor confidence. Credit Suisse is the first major global bank to be given an emergency lifeline since the 2008 financial crisis.

(With Reuters inputs)

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