By Nomi Prins, Editor, Inside Wall Street with Nomi Prins
A 50% drop.
That’s how much San Francisco-based First Republic Bank’s shares fell earlier this week.
The decline looks even more impressive on a chart. Take a look below…
In fact, First Republic’s stock has lost nearly 90% of its value since early March. So in its current state, First Republic looks all but worthless.
As you well know, last month, Silicon Valley Bank (SVB) and Signature Bank collapsed in just a matter of days. Global banking giant Credit Suisse in Europe followed shortly afterward.
Bank analysts and the financial media’s talking heads thought the events wouldn’t cause a banking meltdown. But I argued otherwise.
As the banking crisis unfolded, I predicted more contagion across the sector.
Here’s what I said in my earlier essay on the bank woes:
My gut tells me there’s probably another ticking-time bomb waiting to go off in the banking sector. In fact, as I mentioned above, trouble is already spreading to Europe. That means we can expect many investors to get burnt.
First Republic Bank is a case in point.
As I write this, First Republic’s failure is sending shockwaves through the market.
So, today, I want to look beyond the headlines. And I’ll show you what this latest banking crisis story means for you and the safety of your money.
There’s an Erosion of Trust in the Banking Sector
As I’ve said previously, what happened at SVB and Signature Bank could repeat if depositors get really worried about the safety of their money.
And that’s exactly what we saw with First Republic.
On Tuesday of this week, the bank revealed that depositors withdrew more than 40% of their deposits last month. Shortly after this report came out, the bank’s shares went into a free fall.
You see, no bank has deposit outflows in billions of dollars on an average day… So what happened with First Republic was actually a bank run.
In fact, management said they could only stop the bleeding after a group of large banks stepped in to save the day.
That was in the form of a $30 billion lifeline in combined deposits from U.S. banking giants including Bank of America, Citigroup, and JPMorgan.
Yet, First Republic’s deposits fell from $176.6 billion in the fourth quarter of 2022 to $104 billion in the first quarter of 2023.
You read that right…
If you exclude the $30 billion the big banks injected into First Republic’s accounts, the bank faced a drop of almost $102 billion. And this decrease in deposits happened in the month of March alone.
Right now, it’s very unlikely that the U.S. government won’t get involved in the First Republic debacle.
During the SVB crisis, the Federal Deposit Insurance Corporation (FDIC) implemented a systemic-risk exception to insure uninsured depositors. This cost an estimated $22.5 billion.
So the government has already set a precedent to bail out the banks.
And with as much as 68% of First Republic’s deposits uninsured – a higher rate than most of its competitors – it’s hard to see the government not stepping in again.
If the FDIC doesn’t make First Republic’s depositors whole, it could rekindle doubts about the general state of our banking system. This could prompt customers to pull their deposits from other banks and trigger a bigger domino effect across the sector.
What’s more, the big banks would have to pay up if the FDIC didn’t guarantee uninsured depositors. And of course, the government can’t have the likes of Bank of America and Citibank taking a cut.
Finally, it’s important to consider the bigger picture…
“Systemic Risk” Is Rearing Its Ugly Head Again
Right now, the financial media talking heads are scrambling to explain away First Republic’s fall as another exception in the banking world.
For one, experts say, the bank catered to wealthy clients by offering interest-only loans. And these loans required no principal payments for a decade.
First Republic couldn’t collect the principal payments on a large portion of its mortgages, and this compounded its woes… That much is true.
But the actual problem is much more systemic in nature.
As you well know, the Fed’s been hiking interest rates aggressively since March 2022.
This has wreaked all sorts of havoc on banks…
For one, with rates going up quickly, banks had to compete with government-issued Treasuries. They were late to hiking rates, meaning they failed to raise interest rates on their deposits fast enough.
So when people chose to put their money in Treasuries instead of bank deposits, the banking sector was in trouble. It lost over a trillion dollars in the first three quarters of 2022 alone.
Second, when rates went from zero at the start of 2022 to over 4% by the end of that year, bond prices fell fast on the open market.
As I explained in a recent essay, this meant that any bank that bought these bonds before the rates went up saw a big paper loss.
Now, normally, a bank holding these bonds shouldn’t face any problems… As long as it keeps the bonds for the duration of their maturity.
But what if you’re facing a bank run and you need to process withdrawals quickly? Well, that means you have to sell some of those underwater assets right away.
Your “paper” losses turn into actual ones. And pretty soon, you’re tittering on the brink of the precipice just like First Republic.
The problem isn’t only with one bank, though.
U.S. banks as a group are currently sitting on $620 billion in unrealized paper losses on government securities.
This year, the banks also expect to earn significantly less from their loan businesses.
In other words, the banks are getting squeezed on all sides.
To say that this is a problem for a system that’s built on confidence would be putting it mildly.
And remember, all of this is happening under the watchful eyes of the Fed and its thousands of bank regulators. That’s ironic, since the Fed’s one real job is to regulate the banks.
Instead, the Fed’s inability to ensure stability across the banking system makes the issue more widespread. (For more details on how the Fed has contradicted its own monetary policy, prioritized bailing out the big banks, and created distortions in the economy… read up here.)
It’s also why I continue to expect more contagion across the sector.
What This Means for Your Money
With all this happening, you, too, might be wondering: Is your money safe in banks?
It depends. But if your bank is FDIC-insured and you have less than $250,000 in there, you have nothing to worry about.
The important thing is to make sure that your deposits are FDIC-insured. Not all banks are. You can find out which ones are by going here.
What if you have more than $250,000 at one bank? In some cases, you can divide it into different account categories to meet FDIC limits.
For more on that, check out the FDIC’s deposit insurance FAQ page.
If anything else happens in the banking sector, I’ll be in touch again.
Editor, Inside Wall Street with Nomi Prins