First Republic says liquidity is “very strong” to calm nerves

• First Republic tried to reassure customers after its stock price crashed following the collapse of SVB.
• The bank said the customer’s average down payment amount was well below the maximum insured limit of $250,000.
• However, about 68% of the bank’s deposits, or nearly $120 billion, are uninsured.

First Republic Bank sought to reassure customers that their deposits were safe as regional lenders scrambled to assuage contagion fears sparked by the collapse of Silicon Valley Bank.

SVB was shut down by California regulators on Friday and acquired by the Federal Deposit Insurance Corporation (FDIC) after its stock price collapsed following a failed $2.3 billion capital raise.

With $209 billion in assets and about $175 billion in deposits at the end of last year, it was the biggest bank collapse since Washington Mutual in 2008, and the second-biggest ever.

A significant portion of the deposits are uninsured, which means that clients can incur large losses if a new buyer cannot be found.

It is feared that the problems gripping SVB, a pullback caused by rising interest rates hurting its bond portfolio and increased outflows of corporate clients, could also affect other banks of a similar size. There is concern that some customers of other regional banks, such as First Republic, might decide to withdraw their funds as well.

First Republic rushes to reassure investors

First Republic’s share price plummeted by a third last week as the SVB imploded. Shares in Western Alliance, a similarly sized regional bank, also fell by a similar percentage.

Major banks such as Bank of America and JPMorgan also fell, but their shares stabilized Friday as First Republic extended its own losses.

According to the latest 10-K filing, First Republic, which has more than 80 branches in seven states, had $176.4 billion in deposits by the end of 2022. Of that, $119.5 billion was uninsured. The share of 68% is considerable, but much smaller than the SVB’s 89%.

In a regulatory filing on Friday, First Republic assured customers of its liquidity position as the stock price fell.

It said the average size of its customers’ deposits was $200,000, less than the FDIC insured limit of $250,000, while the average business account was $500,000.

First Republic’s liquidity position remains very strong. “Resources beyond a well-diversified deposit base include more than $60 billion in available, unused borrowing capacity at the Federal Home Loan Bank and the Federal Reserve Bank.”

Contamination fears linger

But investors are far from convinced that First Republic has allayed contagion fears.

Like SVB, First Republic’s latest filing showed a major discrepancy between the fair market value and balance sheet value of its assets. These are mostly tied up in mortgages, whose rates have risen over the past year alongside the Fed’s key interest rate.

Like SVB’s bonds, First Republic’s long-term mortgage assets are most likely worth less than their true value.

Brian Levitt, global market strategist at Invesco, told Insider that SVB and First Republic in particular had emerged as banks with balance sheets ill-prepared for higher interest rates and a possible recession.

“Investors who smell blood then turn their attention to the next bank exposed to interest rate risk and specific credit risk, then the next,” he said. “First Republic Bank, which has significant exposure to the coastal real estate markets, appears to be next on the list.”

In a tweet on Saturday, billionaire investor Bill Ackman warned that regulators had 48 hours “to fix a soon to be irreversible mistake” that could engulf the entire banking sector, echoing contagion fears.

Regulators can step in to create a wider safety net to secure more deposits from struggling banks, in an effort to calm nervous customers.

Bloomberg reported that the FDIC and the Federal Reserve were in talks to create a vehicle that would create a backstop to secure more deposits in banks facing similar problems to the SVB.

First Republic did not immediately respond to Insider’s request for comment outside of normal business hours.