The Eagle Has Fallen

May 02, 2023

This chart description is for illustrative purposes only and its accuracy cannot be guaranteed. Please see full disclosures at end of PDF document in the web post. General description: Three-line chart showing year-to-date returns for First Republic Bank, KBW Regional Banking Index, and S&P 500. Chart subtitle: First Republic’s stock had been under pressure since SVB’s demise, though losses escalated after the bank reported clients had withdrawn more than half of the bank’s deposits. Chart source: Bloomberg as of May 1, 2023. Chart visual description: Y-ais is labeled YTD Return and ranges from +20% to -100%. X-axis shows dates from 1/3 to 4/25 in weekly increments; data is daily. First Republic Bank is plotted in brown, KBW Regional Banking Index is plotted in slate, and S&P 500 is plotted in light blue. Chart data description: Up to mid-March all three lines were positive. S&P 500 has remained positive, but KBW Regional Banking Index had a sharp decline in March, from +1.0% 3/6 to -17.5% 3/13. Since then it has slightly recovered several times, but has continued to decline overall, to -23.6% as of 5/1. First Republic Bank saw a huge decline in March, from 0.1% on 3/6 to -74.4% on 3/13. Since then, FRB has continued to decline, and as of 5/1, it hit -100%. End chart description. See disclosures at end of document.

When First Republic Bank’s 84 branches opened Monday morning, they belonged to the since-failed bank in signage alone after a tumultuous several weeks marked by depositor flight and a portfolio of loans that had dropped substantially in value amid rising interest rates. Three of the four largest U.S. bank failures have occurred in the past two months, with First Republic, now the second-largest bank to fail in U.S. history, behind only the 2008 collapse of Washington Mutual, the latest.

Despite an initial $30 billion lifeline from the U.S.’s largest banks in the wake of the Silicon Valley Bank (SVB) collapse, First Republic went on to lose more than $100 billion in deposits during March. Regulators took control of First Republic and oversaw a sale to JPMorgan Chase on Monday morning. JPMorgan, already the nation’s largest bank, will take on all $92 billion of deposits remaining at First Republic and “substantially all” of its assets, including $173 billion of loans and approximately $30 billion of securities. As part of the agreement, the FDIC will cover some of First Republic’s loan losses and provide JPMorgan with $50 billion in financing, with the deal estimated to cost the FDIC roughly $13 billion. JPMorgan will also return the $25 billion in uninsured deposits its large peers deposited into First Republic as part of the Treasury’s March plan to prop up the bank.

While the U.S. banking system is not yet out of the woods, the demise of First Republic, another regional lender with a concentrated depositor base and an investment portfolio that was overly exposed to rising rates, does not come as a surprise and does not change the contagion narrative. Markets have remained calm with generally solid earnings reports from other regional banks and ongoing support from the FDIC. While overall macro uncertainty remains, the risk of a broader breakdown in the U.S. banking system does not seem to be an imminent threat.

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