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What We Can Learn from the First Republic Bank Failure

What We Can Learn from the First Republic Bank Failure

May 03, 2023

Silence means more than words, in some cases. We just witnessed the 4th bank failure this year as the government took control of First Republic Bank on Monday, May 1st and organized the takeover by J.P. Morgan. It was the release of quarterly earnings on April 24th after the market closed and then silence, that confirmed the fate of First Republic Bank. During the earnings release, most CEOs or CFOs will give commentary and take questions, but not First Republic. They released a brief news statement that showed deposits decreased more than expected and earnings were weaker than expected, but failed to give a human voice to reassure investors. This caused the stock to freefall and depositors to rush to the exits.

A few smooth words from the CEO probably would not have saved the bank, but it may have made it all happen in a more orderly fashion. At the end of 2022, First Republic had $176.4 billion in deposits, 68% of which exceeded the Federal Deposit Insurance Corp.’s $250,000 insurance limit, which meant customers were not guaranteed to get that cash back if the bank failed. Deposits accounted for 92% of the bank’s funding. In an investor presentation in mid-January, the bank touted its small number of deposit accounts—about 20% of what other banks of its size had. So, it is understandable why depositors took their cash out of First Republic when Silicon started to have trouble. Keeping all your eggs in one basket is never recommended.

First Republic’s business model was to offer “white-glove” service to a small client base with large deposits. This worked well until interest rates inverted during 2022. When the bank didn’t have to offer interest on cash deposits, their business model was great; but as interest rates increased throughout 2022, First Republic had to start paying at least a minimal amount to retain the deposits. First Republic increased deposits 13% in 2022, but it paid dearly for them. In the fourth quarter, First Republic paid $428 million in interest on deposits, up from $20 million a year earlier. It hurts the bottom line of any business when expenses increase.

First Republic mainly used deposits to make real estate loans to their wealthy depositors. These fixed, low-rate loans are paid back over 30 years and typically and do not offer any offset when rates increase. In 2022, more than half of First Republic’s loans were residential mortgages with an average interest rate of 2.89%. If depositors didn’t demand their deposits back, all would be ok; but as we know, that’s not what happened.

During the March Silicon Valley failure, a group of banks led by J.P. Morgan deposited $30 billion into First Republic to help keep it alive and meet the demand for bank withdrawals. In the end, it wasn’t enough. Not including the $30 billion rescue, its deposits shrank by about $102 billion during the first quarter.

First Republic also had a thriving wealth management business. This was a symbiotic relationship with the First Republic banking business. First Republic benefited for years from collaboration between its wealth management and banking units. Last year, the company’s bankers referred more than $11.5 billion of assets under management to the wealth unit, which in turn referred deposit balances totaling more than $3 billion to their banker colleagues. Deposits referred by wealth managers and sweep accounts represented more than 13% of the bank’s total deposits.

The wealth management advisors began to jump ship at the start of 2023 and intensified during March, which also contributed to the failure of the bank. Earlier this year, First Republic had around 300 advisors. Since March 17, at least 21 wealth management practices—either teams or solo advisors—left First Republic for competitors according to public registration records. Departing advisors oversaw more than $40 billion in assets, and they were no longer bringing in deposits for the bank.

On Monday morning, J.P. Morgan agreed to acquire all the bank’s deposits, loan portfolios, and some of their bonds. This deal helped depositors and calmed investors. However, those who owned First Republic stock lost the full value of it. Thankfully, it was only the 195th largest holding in the S&P 500 Index and made up less than 0.05% of the index.

Ever since the financial crisis of 2008, the government has not wanted banks to become too large or too important to the overall banking system for fear of systemic risk. With J.P. Morgan gathering more assets, the government will need to find new ways to tackle the big bank problems.

We can feel safe that the whole banking system is not going to fail. The lesson learned is to diversify your holdings and adhere to limits. As a reminder, the FDIC insures deposits up to $250,000 in each institution for each individual. If you cross this threshold, it could be an opportune moment to discuss alternatives to just leaving it in the bank and deploy some creative investment strategies. If you have questions about your own portfolio or the current economic or capital market environment, please reach out to me at or 800-327-2377.