First Republic Bank, its stock overall down as of April 25 from $120/ to $8/share, may yet fail. The first-quarter statement released April 24 says the bank is “exploring strategic options” (i.e., trying to sell its loan book, or to get taken over, to avoid failing) after client withdrawals of more than $100 billion in the first quarter. Even taking into account the $30 billion package of deposits from large banks organized by the Fed, First Republic’s deposit base still shrank by 41% in the first quarter. It has had to borrow $138 billion from the Fed’s Bank Term Finance Program, the Federal Home Loan Bank, and JPMorgan Chase, on all of which it’s having to pay around 5% interest; so it will run out of cash. It’s meanwhile laying off one-fourth of its employees. “It was much worse than I thought,” one analyst on the earnings call is quoted by American Banker.
First Republic stock dropped by half the next day, April 25, and trading was halted in the morning of April 26.
Overall, by the Fed’s Form H8 made into a Bloomberg chart, deposit loss rate by the 25 largest banks—which have lost approximately 9% of deposits lost since March 1, 2022, the 15-month “Powell imitates Volcker” period—exceeds that of the other 4,000 commercial banks, which have lost about 7% of their deposits in that period. Most of the loss since Dec. 1, 2022. After a pause at the end of March 2023, this loss has resumed.
What is happening repeats Volcker’s annihilation of the savings and loan banks in 1981-87, including through the Garn-St Germain Act which allowed them to offer all kinds of new “savings products” with high interest rates and FDIC insurance, and thus drove them into risky securities to make their cost of capital, and to bankruptcy.
The Glass-Steagall Act prohibited this but was simply not applied, as Federal Home Loan Bank Board regulator Prof. William K. Black explained a decade ago.
Now the smaller and mid-size banks are frantically hiking their CD rates, while their lending is contracting. This takes them down. The big banks are not significantly raising their CD rates. This is because deposits are flowing into “savings products” marketed by shadow banks which are usually units of, or controlled by, the same 25 biggest banks! These shadow banks invest their deposits in securities, not loans.
The Glass-Steagall Act will prohibit these bank interconnections.
