Why First Republic failed. Are other banks to follow?
Why did First Republic fail?
(AP) — First Republic grew rapidly through deposits from wealthy individuals and companies. It used those deposits to make large loans, including jumbo mortgages, when interest rates were at historically low levels in hopes of then convincing customers to expand into more profitable products like wealth management.
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Many of the bank’s accounts had deposits well north of the federally-insured $250,000. Once Silicon Valley Bank went under, clients pulled their money, fearful their deposits were in danger. First Republic said last week that depositors had withdrawn more than $100 billion, most of it during a few days in mid-March.
What bank or banks are next?
For now, analysts expect the banking system will be spared any more large bank failures, saying the problems at Silicon Valley, Signature Bank and First Republic were unique to those companies.
Other midsize banks suffered large withdrawals of deposits and were forced to borrow from federal programs to shore up their balance sheets, but none were hit as hard as First Republic.
What happens to the stockholders?
First Republic’s stock traded at $115 on March 8, then plummeted in the following days and weeks and closed Friday at $3.15. About $20 billion in market value has been wiped out. Trading in the stock was halted before U.S. markets opened Monday.
JPMorgan Chase, which has agreed to buy the deposits and most of the assets of First Republic, stressed that it is not assuming any of First Republic’s corporate debt or preferred stocks.
After a bank’s failure, bondholders are among the last to get paid — stockholders are at the very end of the line. The FDIC does not give estimates on how likely any creditor is to get repaid.
