First Republic’s pain had a lot to do with its reliance on wealthy clientele

New York      CNN         — 

First Republic, which entered a death spiral six weeks ago and was seized by the Federal Deposit Insurance Corporation early Monday and taken over byJPMorgan Chase, is the third US lender to fail in two months — and the reason has a lot to do with its well-heeled client base.

The banking turmoil that started with Silicon Valley Bank in March set off a panic among depositors and investors, who fled regional bank stocks that had real and perceived similarities to SVB.

First Republic, only slightly larger than SVB and catering to a similarly wealthy coastal clientele, immediately had a target on its back.

What happened?

Both Bay Area-headquartered lenders catered to elite customers — businesses and individuals — who carried large cash balances. In both cases, the banks had an outsized proportion of deposits over the $250,000 covered by the FDIC.

“These depositors are particularly trigger-prone,” Patricia McCoy, a law professor at Boston College, told CNN last month. “They’re sophisticated, they know they have other options, and they have mechanisms in place to move money quickly.”

That particularly volatile base of depositors presents a risk for investors.

And indeed, when First Republic released its first-quarter earnings on Monday — accompanied by an unnervingly short investor call in which leaders took no questions from investors or media — the bank revealed that it lost more than 40% of its deposits, or roughly $100 billion. The news sent its stock to a new low.

Big banks like JPMorgan Chase and Bank of America have diversified their depositor bases to include more of what McCoy calls “sticky deposits.” In other words, regular folks who have less than $250,000 in the bank and won’t be as quick to flee.

About two-thirds of First Republic’s deposits were uninsured. That’s far less than the 94% uninsured that Silicon Valley Bank had, but First Republic also had an unusually large 111% loan-to-deposit ratio at the end of last year, according to S&P Global — meaning it has loaned out more money than it has in deposits.