First Republic, which entered a death spiral six weeks ago and was seized by the Federal Deposit Insurance Corporation early Monday and taken over byJPMorgan Chase, is the third US lender to fail in two months — and the reason has a lot to do with its well-heeled client base.
The reason has a lot to do with the high-net-worth people who bank there.
“It’s the biggest example of a bank that could go down and shouldn’t go down — a first-class bank,” said a source close to the 48-hour deal to infuse First Republic with $30 billion in cash.
San Francisco-based First Republic, the 14th-largest bank in the country, received the cash infusion from 11 rivals, including America’s largest lenders.
When JPMorgan Chase CEO Jamie Dimon on Thursday reached out to Treasury Secretary Janet Yellen and Federal Reserve Board Chair Jerome Powell, “Very quickly the conversation turned to First Republic,” the source told CNN.
The government-organized rescue isn’t a bailout — its goal is to give the bank enough cash to meet customer withdrawals and assure investors that it can withstand the turbulence that’s shaken the industry over the past week.
So far, it’s not having the desired effect.
“The market is saying, ‘This is still not enough. We need more,’” Ed Mills, Washington policy analyst at Raymond James, told CNN on Friday.
Why did First Republic have a target on its back?
Both Bay Area-headquartered lenders catered to elite customers — businesses and individuals — who carried large cash balances. In both cases, the banks had an outsized proportion of deposits over the $250,000 covered by the FDIC.
“These depositors are particularly trigger-prone,” Patricia McCoy, a law professor at Boston College, told CNN last month. “They’re sophisticated, they know they have other options, and they have mechanisms in place to move money quickly.”
That particularly volatile base of depositors presents a risk for investors.
Big banks like JPMorgan Chase and Bank of America have diversified their depositor bases to include more of what McCoy calls “sticky deposits.” In other words, regular folks who have less than $250,000 in the bank and won’t be as quick to flee.
About two-thirds of First Republic’s deposits were uninsured. That’s far less than the 94% uninsured that Silicon Valley Bank had, but First Republic also had an unusually large 111% loan-to-deposit ratio at the end of last year, according to S&P Global — meaning it has loaned out more money than it has in deposits.
—CNN’s Matt Egan and Christine Romans contributed reporting.