Shares of First Republic Bank fell around 50% on Tuesday, a day after a troubling earnings report and a conference call with analysts in which company executives declined questions. The speed of the decline triggered a series of volatility-induced trading stops by the New York Stock Exchange.
On Monday, after the close of regular stock trading, First Republic released results that showed how perilous the bank’s future had become since mid-March. The bank said its customers withdrew $102 billion in deposits in the first quarter, well over half of the $176 billion it held at the end of last year.
First Republic received a $30 billion temporary lifeline in March from the country’s largest banks last month to help shore up its business. These banks can, however, withdraw their deposits as early as July. In the first quarter, First Republic also borrowed $92 billion, mostly from the Federal Reserve and government-backed lending groups, essentially replacing its deposits with loans.
Bank executives did little to build trust during his conference call, offering just 12 minutes of prepared remarks. The bank also said on Monday it would cut up to a quarter of its workforce and cut executive pay by an unspecified amount.
“It’s a trust issue, as it is with any bank, and when trust is lost, money will leak out,” wrote New York University finance professor Aswath Damodaran. , in an email.
Wolfe Research analyst Bill Carcache laid out what he called “the long list of questions we weren’t allowed to ask” in a research note Tuesday. Among them: how can the bank survive without raising new funds and how can it continue to provide attentive customer service – a staple of its reputation with wealthy clients – while reducing the very staff that provides it?
The bank’s options for bailing out in the absence of a government seizure are limited and difficult. No buyer has emerged for the bank as a whole. Any bank or investor group wishing to take over the bank would have to take over First Republic’s loan portfolio, which could burden the buyer with billions of dollars in losses due to recent interest rate swings. The bank is also a tough sell in pieces because its customers use many different services like checking accounts, mortgages, and wealth management.
There are no easy solutions to the situation in the First Republic, said Kathryn Judge, a financial regulation expert at Columbia Law School. “If there were any good options, they would have pursued them already,” Ms Judge explained.
The Fed can no longer assume part of a bank’s financial risk to facilitate a takeover as it did in 2008, as reforms after the financial crisis have altered its powers. And while the Federal Deposit Insurance Corporation may be able to help in some way, it would most likely involve bankrupting the bank and invoking a “systemic risk exception”, which would require the endorsement by officials from multiple agencies, Ms. Judge said.
Still, if the bank fails, the government will have to decide whether to protect its uninsured depositors, which could also be a difficult decision, she said.
“There really is no easy answer,” Ms Judge said.
Fed and FDIC officials declined to comment.
Rob Copeland contributed report.