First Republic Bank (FRB) has now become the second-largest bank failure in the U.S., news reports officially made May 1, 2023, with most of its business sold to JPMorgan Chase after federal regulators seized it. The bank was suffering from a run on deposits just weeks after the collapse of two other large regional banks, Silicon Valley Bank and Signature Bank.
Each First Republic client had a “First Republic Relationship Manager” who served as a point of contact for personalized service. Services focused on private banking and private wealth management as well as private business banking.
Why Did First Republic Bank Fail?
First Republic Bank failed for many of the same reasons that Silicon Valley Bank and Signature Bank failed, including the fact that it carried a significant amount of uninsured deposits and struggled with liquidity. Compounding this was the broader fear among investors over regional banks.
- Uninsured deposits: A high number of uninsured deposits can contribute to a bank run when investors start to panic. First Republic’s wealthy customer base had a high proportion of uninsured deposits, with more than 67% of the bank’s deposits being uninsured as of December 2022.
- Lack of liquidity: First Republic’s primary income source was net interest income from loans and investment securities. Many of its investments were in real estate loans and municipal securities, which were less liquid and not earning competitive interest rates. Among midsize banks, First Republic had the highest ratio of loans and securities to uninsured deposits in December 2022.
- Credit ratings downgrades: First Republic Bank faced repeated credit agency downgrades due to concerns that infusions wouldn’t resolve its challenges with liquidity, funding, and profitability.
- Mistrust in regional banks: Due to the collapses of Silicon Valley Bank and Signature Bank earlier in the year, along with credit ratings downgrades, investors were increasingly concerned about keeping uninsured deposits with a regional bank.
First Republic began borrowing from the Federal Home Loan Bank Board (FHLB) and Federal Reserve and accepted a $30 billion cash infusion from a consortium of 11 banks as its deposits started rapidly declining after the failure of Silicon Valley Bank and Signature Bank. Meanwhile, its share price plunged from $122.50 on March 1, 2023, to $3.51 on April 28.
First Republic Bank was among a few regional banks that failed in early 2023 due to bank runs driven in part to the high volume of uninsured deposits they carried, along with financial struggles caused by the broader interest rate environment.