First Republic Bank's shares ended at $122.07 on March 6th, however, they are now worth nothing because the bank has gone bankrupt and has been placed in government receivership. This event raises more questions than it answers, and it's worth noting that the Federal Reserve issued a report on the demise of Silicon Valley Bank just one day before First Republic went bankrupt.
The report focuses on mismanagement by Silicon Valley Bank's leadership and board of directors, which led to the bank's demise. However, the report mentions Silicon Valley Bank as an outlier in the banking system due to its highly concentrated business model, interest rate risk, and reliance on uninsured deposits. This raises the question of whether there is a systemic liquidity problem in the banking system beyond simple interest rate control. Even if there is a liquidity crisis, the Federal Reserve claims to have instruments to reduce the damage and prevent contagion. However, the markets appear to be expecting things to worsen. Data from the banking system for the week of April 19th show curve inversions and low nominal rates, which are significant departures from the 70s and 80s and may signal fundamental flaws in the banking system.
The current economic condition in which the market is highly inverted, signaling a strong probability of recession. However, unlike in the past, when inversions were associated with returning the market to normalcy and lowering inflation, the current situation is different due to the low nominal rates. This implies that a recession will not solve the inflation problem, but will instead reintroduce and exacerbate the deflationary crisis. Overall, the situation is troubling, and the public is left with more questions than answers.
Through the H8 release, the Federal Reserve provides data on the assets and liabilities of the US commercial banking system. This data solely applies to US banks and does not include information on overseas or offshore banks that may be having comparable problems. Bank credit increased by $23 billion in the week ending April 19th as a result of lending and securities purchases, although it remains down by $269.2 billion since mid-March. Cash assets increased by $32.3 billion, but loans decreased by $65.5 billion since mid-March. Despite a $60.9 billion inflow of large time deposits, deposits rose by $21 billion but are still down by $230.6 billion since mid-March. Borrowings have only fallen by $65 billion since mid-March, and banks continue to hoard substantial amounts of liquidity and emergency funding. The banking sector remains weak, which is most likely why First Republic has closed its doors.
The residual assets of the First Republic, which has already failed, are currently being scrutinised by various vultures who were waiting for its demise. This begs the question of why no one purchased the bank before it fell into receivership. When a bank is in difficulties, it is easier to let it fail and then buy the assets at a loss. However, this means that the remaining valuable assets, such as those held by Silicon Valley Bank, will face competition. If First Republic had been a well-managed bank with solid assets, it would have made sense to acquire it before it went into FDIC receivership. However, questions remain about what is going on with the bank's books, particularly concerning assets such as commercial real estate. People begin to wonder if other banks are also in trouble as a result of the lack of answers. This is causing abnormal deflation and a credit crunch, which is reflected in yield curves. Despite the Fed's claim that it has kept the system from collapsing, there are still significant risks of contagion and deflationary pressure, as banks continue to fail. These issues were not discussed in early March, but they have already emerged and show no indications of abating.
Source:
Eurodollar University, 29 April 2023, "There is a lot more going on here than just one, no two, now three banks.",
