First Republic Bank shares fell about 50% on Tuesday, a day after company executives declined to answer questions during a troubling earnings call and conference call with analysts. The speed of the decline triggered a series of volatility-induced trading halts by the New York Stock Exchange.
After the normal stock trading ended on Monday, First Republic released results showing just how dangerous the bank’s future has become since mid-March. According to the bank, customers withdrew $102 billion in deposits in the first quarter. That’s well over half of his $176 billion he had at the end of last year.
Last month, First Republic received a temporary $30 billion lifeline in March from the nation’s largest bank to help bolster its business. However, these banks will be able to withdraw deposits in July. In the first quarter, the First Republic also borrowed him $92 billion. Most of it was borrowed from the Federal Reserve and government-backed lending groups, effectively replacing deposits with loans.
Bank executives did little to build confidence on the conference call, offering only 12 minutes of prepared remarks. The bank said on Monday it would cut his quarter of its workforce and cut executive compensation by an unspecified amount.
“This is a trust issue, as with any bank. When trust is lost, money flies away.” Aswas Damodaran, a professor of finance at New York University, wrote in an email:
Wolfe Research analyst Bill Carcache presented what he called a “long list of questions we’re not allowed to ask” in Tuesday’s research notes. So how can banks survive without raising new money? Is not it?
Absent government seizures, banks’ options for saving themselves are limited and challenging. A bank-wide buyer has not appeared. Banks and investor groups interested in acquiring the bank would have to underwrite First Republic’s loan portfolio and could lose billions of dollars based on recent interest rate movements. Customers also use a variety of services, such as checking accounts, mortgages, and wealth management, making it difficult to sell apart.
Kathryn Judge, a financial regulation expert at Columbia Law School, said there is no easy solution to the First Republic situation. “If there was an attractive option, they would have already pursued it,” Judge explained.
The Fed can no longer take the financial risk of banks to facilitate acquisitions as it did in 2008. This is because post-financial crisis reforms have changed the powers of the Fed. The Federal Deposit Insurance Corporation might be able to help in some way, but that would likely include bank failures and the activation of the Systemic Risk Exception, which would require approval by officials from multiple institutions. Judge said it will be necessary.
But if a bank fails, the government will have to decide whether to protect uninsured depositors, which can also be a difficult decision, she said.
“There’s really no easy answer,” said Judge.
Officials for the Fed and FDIC declined to comment.
Rob Copeland contributed to the report.
