Explore what led to the tragic collapse of the 14th largest US commercial bank and its potential spillover effects.
Another day, another bank failure; this time, it is not a small bank. It is the 14th largest among US commercial banks. It is the glorious bank which served the wealthy US citizens.
Yes, we are talking about the First Republic Bank. It has marked the second-largest bank failure in US history and the third since March 2023.
It all started with the collapse of the Silicon Valley Bank, followed by the Signature Bank. A few days later, in March 2023, First Republic Bank made headlines because there was a bank run where depositors ran to the bank and withdrew billions of dollars in a matter of few hours. And we discussed this in this article.
After what the US citizens saw, everyone was terrified of what was ahead for the US banking crisis. And just in time, 11 banks came together to save the First Republic Bank by injecting $30 billion to keep things afloat. Still, the bank could not be saved, and it collapsed.
So, the US banking regulators took over the First Republic over the past weekend. Now, JPMorgan is said to acquire all of First Republic’s deposits and most of its assets.
JP Morgan’s acquisition of First Republic is set to bring in an impressive $92 billion in deposits, including the $30 billion injected by other banks two months back. In addition to this, the bank will acquire $173 billion in loans and $30 billion in securities, further strengthening its position in the industry, according to CNBC TV18.
Reason Behind the Collapse
First Republic Bank had a standard business model. The bank’s strategy was offering minimal interest on deposits and lending primarily to wealthy clients at rates lower than its competitors.
The strategy was great until the interest rates increased drastically. Wealthy customers began withdrawing their deposits because they got better returns elsewhere, causing a revenue hit for the bank.
The bank started cost-cutting, including hiring slowdowns and layoffs. Despite these efforts, the bank’s quarterly results showed that depositors had withdrawn over $100 billion during April 2023’s crisis.
This was particularly concerning as deposits above $2,50,000 were uninsured, causing widespread worries about the bank’s stability. The bank’s financial performance also took a hit, with a 33% decline in profit to $269 million over the first quarter of 2023 compared to the same period in the previous year. Revenue also dropped by 13% to $1.2 billion over the same period.
The impact of the challenges faced by First Republic Bank was evident in the significant drop in its share price. At the beginning of February 2023, the bank’s share was trading at $147. However, by 28th April 2023, the stock price had plummeted to $3.51, representing a massive decline of approximately 97.6%!
The impact of the American banking crisis has been felt not just within the United States but across the globe. Following the collapse of Silicon Valley Bank, banks in the US, Europe, and Japan collectively lost a staggering $459 billion in market value in just one month, according to the Financial Times.
It’s become clear that whenever a major financial crisis occurs in the US, its ripple effects are felt far beyond its borders.
As we look to the future, it’s difficult to say whether the American banking crisis has run its course or if this is just the beginning of a much larger banking crisis.
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!
*The article is for information only. This is not investment advice.