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In an Unsteady Banking Industry, First Republic’s Problems Stood Out

Is the worst banking crisis over? It may seem strange to ask such a question in the immediate aftermath of the First Republic Bank failure, the second-largest bankruptcy in U.S. history, but many industry experts believe the issue was once skyrocketing. It is specific to banks that

Investors also appear to have reached that point of view. Financial markets were much calmer than they were in mid-March, when the failures of Silicon Valley and Signature banks sparked an industry-wide panic, as the First Republic raced toward collapse and stock prices plummeted. rice field.

First Republic was seized by regulators early Monday morning and sold to JPMorgan Chase. The S&P 500 stock index rose a few hours later, as did JP Morgan stock. Small-bank stocks rocked by March’s turmoil were largely modest.

The First Republic collapsed after depositors and investors abandoned the institution, withdrew their money and sold their shares en masse, mirroring the failures of Silicon Valley Bank and Signature Bank. , huge real estate loans that quickly lost value as interest rates rose, and a concentrated customer base of wealthy depositors who quickly withdrew large amounts of funds were also problems.

While many banks continue to face tough economic times, no other prominent lender appears to have a similarly pressing challenge. Dozens of regional banks reported first-quarter earnings underscored that over the past few weeks, not as bleak as many investors and analysts had feared.

“The problem with the First Republic was already visible on March 10,” said Nicholas Veron, a senior fellow at the Peterson Institute for International Economics, of the day the Silicon Valley Bank collapsed. “For me, this is a leftover from the previous episode. The only surprise here is that it took so long.”

First Republic lost $102 billion in deposits in the first quarter, while other banks’ withdrawals stabilized much more quickly. Los Angeles lender PacWest Bancorp lost about $6 billion in deposits during the quarter, but the outflow reversed by late March, according to executives. Western Alliance, an Arizona bank that is also under scrutiny, added $2 billion in deposits in the first half of April.

The KBW Regional Banks Index, an index of small US regional financial institutions, barely tumbled even as First Republic’s share price plunged. come. This is also the message many bank executives have tried to send as they distance themselves from their battered rivals.

This is a distinctly different reaction than investors had in March. After the sudden collapse of Silicon Valley Bank, bank indexes plummeted and the broader stock market plunged amid fears of a worsening credit crunch and economic crisis. In the weeks that followed, including the first trading session after the demise of the First Republic, the S&P 500 recorded a series of gains, more clearly easing the First Republic’s problems.

Bank analysts say no other large bank is on the brink more visibly than First Republic, and they believe a major government takeover is unlikely in the coming weeks. I’m here. That said, banks still face many risks.

Rising interest rates are both a blessing and a curse for financial institutions. Banks can earn more from lending, but are under greater pressure to offer higher interest rates to encourage depositors to keep their cash. Bruce Winfield Van Thorne, CEO of Citizens Financial Group, told analysts on April 19, “We’ve spent more money on fundraising than we expected this year. will be,” he said.

The biggest cracks threatening local banks are in their commercial real estate portfolios. Medium-sized banks are the nation’s largest lenders to projects such as multifamily housing, office towers and shopping centers. Rising interest rates are stressing the market.

With more than $1 trillion of commercial real estate loans due by the end of 2025 and banks tightening underwriting, many borrowers could struggle to refinance their debt. Regulators and analysts are watching closely to see if these challenges evolve into broader economic issues.

Empty office buildings are a particular problem: vacancy rates rising nationwide New construction is also plummeting as the industry adapts to how remote work may have permanently changed the demand for office space.Commercial Real Estate Loan Delinquency Rate creep upbut they are well below the peak of the pandemic.

Credit rating agency Moody’s downgraded 11 regional banks in April. Specifically, it cited its exposure to commercial real estate and the “impact of the work-from-home trend” in the office market as reasons for its bleak outlook on the bank’s outlook.

The average bank has about a quarter of its assets tied up in real estate loans. Thousands of banks have already lost value in loans and securities due to rising interest rates. According to Tomasz Piskolski, a professor of real estate finance at the Columbia Business School, hundreds of banks could see their assets valued below their liabilities if defaults in commercial real estate were to rise significantly.

and new working paperbased on a yet-to-be-peer-reviewed study, Dr. Piskolsky and his co-authors found that if real estate portfolios lost value and uninsured depositors fled in fear, dozens of local banks would I calculated that I could be in serious trouble.

“This is not a liquidity issue, it’s a solvency issue,” Dr. Piskorski said in an interview. This does not mean that these banks are doomed. Bankrupt lenders can survive if given time to recover and process their losses. But these financial institutions are vulnerable to a run on the bank.

The Federal Reserve (Fed) has a lending program to help banks in distress. This includes a program created last month to provide banks with loans at original value for certain distressed assets. Dr Piskorski thinks this is a good short-term intervention, but remains concerned about the impact if economic conditions worsen later this year.

“Signs aren’t always reassuring,” He cited further hazards such as slowing job growth and a near-frozen housing market.”These are not very favorable conditions for the banking system,” he said.s.

In addition to the pressure smaller banks will face in the coming months and years, analysts expect tighter regulatory oversight and eventual new rules. His three-government review, released Friday, highlighted lax and failing regulation, allowing Silicon Valley and signature banks to grow despite clear signs of trouble.

This will encourage banking regulators to be quicker to warn of problems that could cause disruption to banks, and to fix them more quickly. “This time opposition from the banking industry probably won’t make much of a difference,” said Ian Katz, managing director of Washington-based research firm Capital Alpha Partners. “Wind is behind regulators to do something.”

Direct transmission from the First Republic appears to have been contained for now. “Since the beginning of Silicon Valley’s collapse, screenings have been carried out to identify weak players,” said Steve Bigger, a JPMorgan analyst at Argus Research. The public’s conclusion should alleviate many concerns about the banking crisis, all of which are now in stronger hands.”

Emily Flitter contributed to the report.

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