First Republic: Timeline of Another Bank Failure

As of late Sunday night, First Republic Bank was still owned by itself. That ended Monday morning when the Federal Deposit Insurance Corporation closed the institution and sold it to JP Morgan Chase Bank.

This will be the third forced shutdown or sell-off of a U.S. bank in about six weeks. Here’s how it happened.

Pre-2022 Bad Habits

Experts, pundits, media, depositors, the banking industry, investors, and probably the average person paying attention to the news have been either asking or explaining what happened in the fall of last year. But more of that shortly.

The real question of what happened probably goes back some years. Charlie Munger, Warren Buffett’s partners at Berkshire Hathaway, told the Financial Times in a weekend interview that the current banking crisis has nothing on the one in 2008. “But trouble happens to banking just like trouble happens everywhere else. In the good times you get into bad habits. When bad times come, they lose too much.”

The biggest of bad habits was likely that banks became accustomed to low interest rates from the Fed. Too much free money became a trap. There was heavy competition among lenders and getting deals meant dropping rates and stretching terms to attract deals.

With so much money coming in, there should have been even more loans to handle. But by 2021, according to the New York Times, supply chain problems and worries about newer variants of the pandemic meant companies were spending less while making higher profits. Banks were flooded with even more cash than before and yet didn’t have as many opportunities to lend. So, they looked for other areas that might offer some profit, if slim. That meant Treasury bonds and mortgage-backed securities. That seemed safe b

June 2022, Reality Knocks

Bonds are priced with consideration to interest rates. When rates go up, already existing bonds with lower rates are now worth less. Banks had two ways to account for the value of that government debt they held. One was available for sale, which meant bonds were regularly repriced according to market moves. The other, more popular because it didn’t undercut value on balance sheets, was held to maturity, but that assumed the bonds weren’t to be sold until close to when they matured.

However, some banks had a lot of money in HTM bonds, and they hadn’t hedged against interest rate changes because, as one expert told GlobeSt.com, banks wanted to keep the cash as profit, not spend it on protection.

December 2022, Reality Kicks Down the Door

By December, things began to look dire. Some banks were feeling pressure because if there were sudden bank runs, with depositors pulling out their funds, they didn’t have enough cash to cover the demands. The lack of liquidity could quickly turn into insolvency.

As the Federal Reserve’s postmortem specifically on Silicon Valley Bank noted, SVB failed “because of a textbook case of mismanagement by the bank,” which didn’t “manage basic interest and liquidity risk.” That wasn’t a single bank issue. Once liquidity was in danger, so were the HTM bonds because banks might have to sell some for cash, but the act of doing so meant the bonds’ values would drop radically, making it harder to find buyers.

Also, according to the Fed, over time, bank supervisors “did not fully appreciate the extent of the vulnerabilities” of the banks. Then they weren’t fast enough to act.

March 2023, Chips Start Falling

SVB and Signature Bank were the first two to collapse. Each had particular concentrations that created vulnerabilities. SVB catered to clubby collections to tech startups and the venture capital groups behind them—and the large volumes of cash above FDIC insurance levels that many depositors, both individual and corporate, had. For Signature, ties to the cryptocurrency industry had a similar danger of contagion, where tight ties between depositors could spark a fear-dominated bank run. Magnifying the problem were social media and tech-enabled withdrawals, as the Fed’s postmortem noted.

First Republic similarly had something of a specialty in high-net-worth individuals. In mid-March, the bank announced that it had access to a total of $70 billion in additional funding if necessary. Rather than calm the storm, it increased the wind speeds. It took 11 big banks putting another $30 billion in deposits into the bank to keep danger at bay for a while.

April 2023, Problems Come Home to Roost for First Republic

By late in April, the problems for First Republic hadn’t stopped. The bank was reportedly looking to sell between $50 billion and $100 billion in assets and had reported that deposits were down by 40.8% from the previous quarter, or 35.5% year over year. Borrowings were up 18.4 times from the previous year, from $5.5 billion to $106.7 billion. It was unsustainable.

The FDIC was trying to engineer sale of First Republic starting last week among half a dozen banks including Citizens Financial Group, PNC Financial Services, JP Morgan Chase, and US Bancorp, according to Reuters. Bids were due by noon on Sunday. Regulators had hoped to have a sale announced by Sunday before Asian markets opened for trade.

May 1, 2023, First Republic Is Gone

In the early hours of Monday, the FDIC finally closed the bank and sold it to JPMorgan Chase. All deposits were bought by JPMorgan, eliminating the need to provide additional coverage.  A loss-share transaction on single-family, residential, and commercial loans will share losses and potential recoveries on the loans to maximize recoveries by keeping assets in the private sector.

One of the factors Munger explicitly pointed to in the interview with the Financial Times was CRE loans, saying that American banks were sitting on many “bad loans.”