Investors focus on the scale of deposit outflows, the way the bank is being squeezed by higher rates, and how many of its loans carry fixed-rate, long-term structures. Pressures on the bank add to debate on the extent to which authorities can, and should, act to stand behind such institutions.

First Republic Bank , the San Francisco-based regional lender which has seen its fortunes hammered amid heavy deposit outflows, suffered a dramatic slump in its share price yesterday after logging a worse-than-expected deposit exodus.

The stock shed 49 per cent to close at $8.10, a new low, the Wall Street Journal and others reported. Trading was halted several times during the day. As the WSJ report noted, First Republic has said it is looking at “strategic options” following the disclosure that it has lost about $100 billion in deposits. A concern is that First Republic is paying more to borrow money but many of the loans it has made are long-term, fixed rate structures, which squeezes the bank’s margins.

As at March 31, total deposits – including $30 billion of time deposits received from large US banks – stood at $104.5 billion, sliding from $162.06 billion, the bank said yesterday. Total wealth management assets, meanwhile, stood at $289.5 billion, up from $274.2 billion a year before. Total wealth revenues were little changed from a year earlier at $223 million. 

Across the whole bank, net income slid to $269 million in Q1 2023 from $401 million a year before, and also fell from $386 million in the end of December 2022. Revenues dropped to $1.209 billion from $1.396 billion a year before.

The bank’s Tier 1 leverage ratio was 8.25 per cent, down from 8.7 per cent in March 2022, and its Common Equity Tier 1 ratio was 9.32 per cent, down from 9.48 per cent. 

“With the closure of several banks in March, we experienced unprecedented deposit outflows. We moved swiftly and leveraged our high-quality loan and securities portfolios to secure additional liquidity. We are working to restructure our balance sheet and reduce our expenses and short-term borrowings,” Neal Holland, chief financial officer at the bank, said.

The pressures on First Republic are a concern for the wider industry. JP Morgan has agreed to deposit $30 billion in the lender in a bid to prevent a contagion risk effect. Since fetching $115 a share in early March, First Republic’s shares have fallen more than 90 per cent.

An issue is whether the US federal authorities allow First Republic to fail and backstop all, or a portion, of its depositors. The risks revive debates held in 2008 about whether government bailouts/protections for banks create a moral hazard problem, with a decade of almost zero central bank interest rates arguably leading people into a false sense of security. There was controversy about how the Biden administration backstopped all depositors in the failed Silicon Valley Bank in March. (That bank has been bought by First Citizens Bank.)