First Republic Bank’s March quarter result indicates to another bank failure coming soon

27 Apr 2023 , 01:15 PM

Frist Republic Bank’s stock price went down by 30% yesterday. This happened after the bank declared its March quarter results. $101 billion worth of deposits were withdrawn from the bank by customers during the quarter. This created panic among investors. The stock price crashed.

First Bank was saved , earlier this year, by $30 billion that was put in the bank by 6 big US banks. This was done at the behest of US Federal Reserve.  Total loans given by the bank at the end of the March quarter stood at $173 billion. Against this, the bank had $104 billion worth of deposits. Short term borrowings stood at $80 billion at the end of the quarter. At the end of the December 2022 quarter, short term borrowings of the bank stood at $6.7 billion. So short term borrowings went up quarter-on-quarter by 1097% in the March quarter. Short-term borrowings have to be paid by the bank within a period of one year or less. This greatly increases the risk of insolvency for the bank. 

These short-term borrowings were taken by the bank to bridge the gap that arose when its customers started withdrawing deposits. Another problem is that the interest rate that the bank is paying on these short-term borrowings is based on the prevailing market interest rate. On the bailout deposits that it received from Federal Reserve and 6 American banks, it is also paying a higher market-linked interest rate. Much of the loans that First Republic Bank has given were given when the interest rates were much lower. So the interest that the bank will pay on its current short term borrowings can be significantly higher than what it will earn on some of the fixed rate loans that it has given. So its Net Interest Income is going to come under significant pressure. 

  Interest rates have gone up, due to interest rate hawkishness of US Federal Reserve. So the value of a large part of the loans given by First Republic has gone down because they earn much lower interest rate than the prevailing interest rates. These include long term mortgage loans that were given before the current cycle of interest rate hikes was initiated by the US central bank. The bank will, therefore, find it difficult to bridge any shortfall between its assets and liabilities by selling its loans.

The scenario for First Republic Bank looks very grim. Chances of it going to see failure soon is very high. Its stock may see more plummeting in the coming days. The US banking crisis will worsen if it fails.