First Republic's final quarter: $100bn walks out the door

First Republic Bank lost $102 billion of deposits in the first quarter, according to the earnings report it finally published on 24 April. That was more than half its deposit base, and the figure excludes the $30 billion lifeline that Wall Street's biggest banks put in. It is the worst deposit run in modern commercial banking. Within weeks the San Francisco lender's business model had been gutted. Its remaining equity fell by 50 per cent within twenty-four hours of the release, and federal regulators began preparing for a seizure that looked unavoidable.

The filings described a bank kept alive by emergency borrowing. To cover the $100 billion hole in deposits, First Republic borrowed more than $100 billion from the Federal Reserve's discount window and the Federal Home Loan Bank system.

How the run started

First Republic's trouble began with someone else's failure. Silicon Valley Bank collapsed on 10 March and Signature Bank two days later, and depositors across the country started checking which lenders looked like them. First Republic fitted the pattern uncomfortably well: a fast-growing bank serving wealthy clients, a large share of whose deposits sat above the $250,000 limit covered by federal insurance.

The speed of the run was new. Silicon Valley Bank's customers tried to withdraw $42 billion in a single day on 9 March, using mobile apps and online banking, while warnings spread through group chats and social media faster than any regulator could respond. Runs that once took weeks of queues outside branches now happen in hours. First Republic's wealthy clients, many of them linked through the same networks of founders, investors and advisers, could move money just as quickly.

The eleven large banks that deposited $30 billion on 16 March intended to show confidence. The market read the gesture as proof that the bank needed help, and the share price kept falling. By the time the quarterly figures were released, the stock had lost well over nine-tenths of its value since the start of March, and rating agencies had cut its credit rating to junk.

Borrowing dear, lending cheap

The borrowing kept the doors open, but at a ruinous price. First Republic paid market rates of between 4.5 and 5.0 per cent for emergency wholesale advances. Its high-grade book of jumbo mortgages and long-dated municipal bonds yielded less than 3.5 per cent on average.

The bank was losing millions of dollars a day. Its net interest margin had collapsed, and mark-to-market losses had wiped out its common equity. No private buyer would take on the balance sheet without a large government guarantee to share the losses.

The loan book was the heart of the problem. First Republic won its wealthy customers with cheap jumbo mortgages, many of them fixed for years at the low rates of 2020 and 2021. Those loans were of high credit quality and almost never defaulted, but a mortgage paying 3 per cent is worth far less than its face value when funding costs 5 per cent, and loans cannot be pledged to the Fed's new emergency facility at par the way Treasuries can.

Why no buyer bites

A healthy bank looking at First Republic sees the same arithmetic. Buying the whole company would mean taking on the loans at book value and absorbing the losses the market has already worked out, while paying something for equity that is worth little. It is cheaper to wait for the government to seize the bank and then bid for the pieces, with the Federal Deposit Insurance Corporation covering part of the losses.

The strongest counterargument is that First Republic's assets are sound. Its borrowers are rich, its loan losses have been tiny, and in time the mortgages will be repaid at face value. That is true, and it is why the bank is not insolvent on a hold-to-maturity basis. It does not help a bank that must pay today's rates on its funding, because the losses arrive as negative income every day until those loans mature.

Job cuts, too late

Management said it would cut headcount by 25 per cent and explore strategic alternatives. Set against a capital hole of that size, the gestures looked almost comic.

Short of an open-ended federal rescue of private shareholders, resolution was the only route left. Regulators have a template. When Washington Mutual failed in September 2008, the largest bank failure in American history, the FDIC seized it on a Thursday evening and sold its banking operations to JPMorgan Chase overnight, protecting depositors while shareholders and many bondholders were wiped out.

Who bears the loss

Shareholders will almost certainly lose everything, and holders of the bank's preferred shares and debt stand behind depositors in the queue. Depositors themselves are likely to be protected, as they were at Silicon Valley Bank and Signature, where regulators invoked a systemic-risk exception to cover uninsured balances. The cost of that protection falls on the FDIC's insurance fund, which is refilled by levies on other banks.

The signals to watch are the FDIC's choice of buyer and the terms of any loss-sharing agreement, which will show how much the fund expects to lose. Deposit figures at other regional lenders, such as PacWest and Western Alliance, will show whether the run ends with First Republic or moves on to the next name.

First Republic shows that a bank cannot be saved once its depositors have lost faith. After $100 billion has walked out, a private restructuring is make-believe, and the only thing left to settle is how much the FDIC must pay a healthy rival to take the remains.