US bank crash saga continues, First Republic shares collapse
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The market is closely monitoring the government's reaction to the crisis hitting the financial sector.
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A view of a First Republic Bank location in New York City (Reuters)
The US banking system continues to raise concerns after shares of First Republic plummeted over 50% on Friday as the bank's first quarter reports on Monday revealed that over $100 billion of deposits were withdrawn over customer fears.
First Republic closed the day at $3.51 down 43 percent, rebounding 7% of losses after trading of shares was paused several times due to extreme volatility.
On November 2021, the bank capital was more than $40 billion, while now it's worth only around $654.
Going into reverse from its peak days in November 2021 when it had a market capitalization of more than $40 billion, the bank now is worth only about $654 million.
Read more: Moody's cuts US banking sector view to negative after banks collapse
The Monday statement also mentioned that the issue of the deposits was stabilized after a consortium of 11 US private banks injected a $30 billion capital in the bank in mid-March and that the First Republic is "pursuing strategic options."
Despite reports of the potential bailout by other banks, so far they remain just reports.
The First Republic is the latest in a series of bank crashes the United States has been witnessing lately.
Following the collapse of Silicon Valley Bank (SVB), New York's Signature Bank, and Silvergate Bank, which marked a historic failure in the US banking system, many have attributed the collapses to soaring interest rates.
The Federal Reserve called on Friday for further imposing strict supervision of banks during a review of the collapse of SVB.
While recent earning reports of mid-sized banks saw a drop in profit forecast as tighter policies are expected to be introduced soon, some market specialists claimed that the financial reports are reassuring.
Read more: US to intervene in the market to counteract non-bank financial firms
According to CFRA Research analyst Alexander Yokum, the most probable coming scenario includes the sale of the First Republic after the Federal Deposit Insurance Corporation (FDIC) puts its hands on it or selling its assets to other financial firms.
But both scenarios would be faced with a common problem, which is the negative values of the bank's loans, that might affect the interest of prospective buyers due to the loss of value.
"Maybe the government will come up with some interesting way to make it enticing," Yokum said.
Action dilemma
So far, it is still unclear what steps the US government would take.
In normal cases, the Fed only covers depositors up to 250,000 in small and mid-sized banks.
But following the bank collapses last March, the Fed and FDIC decided to guarantee deposits that exceed the $250,000 mark in attempts to fight contagion fear across the banking sector.
However, former FDIC Chair Sheila Blair said the government's "ill-advisedly created an expectation that for any future bank failures, uninsured deposits would be protected."
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Nonetheless, if the government did not take this action this time, "I do worry that that's going to surprise people and could be disruptive," she added.
Morningstar analyst Eric Compton deemed that First Republic's prospects have dropped since Monday, while the latest numbers only skyrocketed deposit flight.
"At this point, we feel that there is a material probability that the bank does not make it, and even if First Republic does survive, we think that the dilution of existing shareholders that would be required to resize the balance sheet would get current shareholders close to $0 as well."
In March, former Lehman Brothers executive Lawrence McDonald revealed that 50 more US bank collapses could be underway if the US government does not address structural issues.
