First Republic Bank's stock price continued to fall on Friday following reports that the lender based in San Francisco, which is currently struggling, will likely be placed under FDIC receivership. The U.S. regulators also provided updates about Signature Bank and SVB. The general trend was positive for bank stocks.
First Republic Receivership Reports
First Republic Bank's stock plunged 46% intraday and hit yet another record low. CNBC reported on Friday morning, citing close sources, that the troubled Bank is likely to be placed under FDIC receivership. It is possible to find an alternative solution. Sources claim they are "engaging in discussions with various parties about our options for strategic growth while continuing to serve clients."
First Republic Bank Shockwaves
First Republic Bank, which has been severely battered by the recession and other financial issues, sent shockwaves through the industry again this week when it announced that deposits had plummeted from $72 billion to $104.5 billion at the end of the first quarter despite the $30 billion injection made by the nation's largest banks including JPMorgan Chase.
Bloomberg reported that FRC shares fell by half on Tuesday following reports that the bank was trying to sell assets worth $50 billion to 100 billion dollars to strengthen its balance sheet and avoid being taken over by the FDIC. FRC shares continued to fall Wednesday after more reports about First Republic's rescue efforts flooded in. This led to multiple trading halts due volatility.
CNBC reported that First Republic had pleaded to its former rescuers for them to purchase bonds at rates above market rate in order compensate billions of dollars in losses. If the bank failed, they would have faced $30 billion in FDIC fees. First Republic cannot afford to sell bonds at their market value. First Republic advisors are ready to buy newly issued shares if they can find willing buyers.
Bloomberg reports that U.S. regulators prefer to wait for a private rescue, because they do not see First Republic Bank as a systemic threat. Bloomberg reported that they're weighing down the possibility of downgrading First Republic Bank's CAMELS ratings, their private assessment. This could limit borrowings from the Fed's discount window and emergency facility, launched last month.
FRC shares have fallen by more than 97% this year so far during the panic in banks.
Other Bank Stocks Are Unfazed
The growing likelihood that the FDIC would take over First Republic, a bank with a high deposit flight rate, did not affect other bank stocks. A FDIC takeover to protect depositors can prevent a larger contagion.
The SPDR S&P Regional Banking ETF KRE rose by 2% on Friday. FRC is one of the many KRE component stocks.
The Financial Select SPDR ETF, which is dominated by giants in the banking industry such as JPMorgan Chase, has risen 0.9% and is approaching its 50-day level. JPMorgan stock climbed, trading above the 50-day line.
Fed Reviews SVB Failed
Michael Barr, Vice-Chairman of the Federal Reserve's Supervision Department and Vice-Chairman for Supervision, released his review of Silicon Valley Bank on Friday morning. Barr stated that SVB failed because of "a textbook case of mismanagement on the part of the bank." He said that senior management failed to manage interest rates and liquid risks, while the board failed to maintain accountability.
SVB is a rare case due to its concentration of business, high risk interest rates and reliance on non-insured deposit. Barr said social media may have fueled fears and accelerated the bank run.
It also showed the Fed's weakness.
Barr said that Fed supervisors did not take strong enough actions and the regulatory standards for SVB are too low. The central bank failed to consider the systemic or contagion risk when designing its tailoring framework.
Barr wrote, "We must develop a culture which empowers supervisors in the face uncertainty to act." "In the SVB case, supervisors delayed taking action in order to gather more information even though weaknesses were evident and growing. It means that SVB's problems were not fixed by the supervisors, despite their worsening.
Barr said the Fed needs to strengthen its supervision and regulatory framework. Some proposals included multiple stress-test scenarios and more continuity in compliance when bank portfolios increase in size.
He wrote: "As the risk in the financial sector continues to evolve, it is important that we continually evaluate our regulatory and supervisory framework. We must also be humble when assessing and identifying new risks."
Barr reiterated the officials' claims that banking is resilient and sound, with strong capital.