First Republic Bank has lost more than 50% of its market value in just this week, with its market value dropping below $1 billion for the first time ever. A brutal week at the exchange has left the bank’s future in doubt, with trading being halted several times and sparking renewed debate about the probability of a new banking crisis. The bank now plans to lay off more than a quarter of its workforce.
With a huge deposit outflow of more than $100 billion this quarter (more than 40% of total deposits), First Republic shares are now a tiny fraction of what they were just a year ago, dropping from $170 a share last year to $16 a share on Monday to a low of $4.92 a share on Wednesday. This means that the bank has lost 59% of its value in just this week and 93% this year, an epic rout that has raised concerns about the overall health of the American banking system.
A CNBC report claiming that the US government was unwilling to intervene to save the struggling bank led to a massive selloff, with the bank’s market cap hitting a low of $886 million on Wednesday, a sharp contrast to its peak of $40 billion in 2021. Investor confidence is now almost non-existent, despite several major banks’ pity depositing’ almost $30 billion to bolster the firm’s assets, and there are serious concerns of yet another bank failure.
No solution is in sight yet
Even the FDIC (Federal Deposit Insurance Corporation) is now considering whether to downgrade the bank’s rankings, a move that would have devastating consequences, as it would bar the First Republic from accessing Federal Reserve emergency lending facilities.
The beleaguered bank is now considering selling almost $100 billion of assets in an attempt to stave off bankruptcy, though precise details are not yet out, and concerns remain over whether this will be enough to save the First Republic. The situation has been described as a ‘game of chicken’ between the US government and major US banks, with both being unwilling to step in and rescue First Republic and both hoping the other side ‘blinks’ first and takes the hit.
Another option the bank management is exploring is creating a ‘bad bank’ to isolate and quarantine the problem areas. A bad bank is when a bank (or multiple banks) separates its non-performing assets into a new corporation to try and save the ‘good’ assets. However, the efficacy of this step is questionable, with some comparing it to taking out a ticking time bomb from your right pocket and putting it into the left pocket.
Fears of a Banking Crisis Reignited
The dire situation at the First Republic has reignited widespread fears of a systemic banking crisis. These fears first arose with the collapse of Silicon Valley Bank, Silvergate Bank, and Signature Bank earlier this year (which ignited the crisis at First Republic Bank initially), as well as behemoth Credit Suisse across the pond in Europe.
With two of the three largest bank failures in American history occurring this year, there is little doubt that the American (and global) banking system is in serious turmoil. With rising Fed interest rates, weak growth outlooks across most of the globe, and the popping of the crypto bubble, Western banks are entering the most disruptive phase they have been in since the 2008 Great Recession.
Despite extraordinary action from governments across the world, trust in the banking system remains low, and investors everywhere fear another financial meltdown a la 2008. While it remains to be seen if such a contagion actually occurs, it is clear that the roil in the financial sector has already had negative consequences on the global economy, with the IMF continuously cutting its growth forecasts since spring.
