US bank, customers flee

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Customers fleeing US First Rebulic Bank: More than $100 billion in customer deposits flowed out in the first three months of the year, as the bank’s quarterly figures show. This is almost 60 percent of the deposit. The bank is experiencing a massive bank run on its client accounts, creating major liquidity problems for the bank.

First Republic Bank shares were down nearly 30 percent at $5.69 on Tuesday. Investors seem to have completely lost faith in the bank: the deed has lost 95 percent of its value since the beginning of March.

still black

First Republic Bank has already threatened to run out of money after Silicon Valley Bank collapsed in March. In the banking quake, two other US regional banks had to give up. The First Republic narrowly escaped: several major US financial institutions led by the US government jumped into the bank and provided $30 billion in liquidity.

However, despite the First Republic being black, its share price only increased for a short time. According to the quarterly report, it made a profit of $269 million in the first three months of the year. The asset management business has proven extremely solid so far. In the first quarter of 2023, assets under management increased by $18 billion to $289 billion.

Is an aftershock imminent?

However, like many US regional banks, the bank has the problem of sitting on top of a mountain of unrealized bond losses. To be specific: Before the Federal Reserve raised interest rates, you bought many bonds with only low interest rates. Existing bonds offer significantly higher returns.

If the Bank of the First Republic now wants to sell its unattractive bonds from the low interest period, it receives very little money from the financial market for it. Unrealized bond losses then become real.

However, if the outflow of client funds continues, the bank may be forced into these bad deals to have sufficient liquidity in the short term. However, this will likely cause the share price to drop further and even more customers flee – a vicious circle.

Banking sector stabilized

According to the Reuters news agency, there is already discussion about having troubled bonds made by the “bad bank”. In the 2008 financial crisis, toxic mortgages were disposed of so that all banks would not fail. But time is running out. The Credit Suisse example has shown that if client funds flow on a large scale over a longer period of time, everything can happen suddenly very quickly.

The good news: While the bankruptcy could trigger upheavals in the US banking industry, it probably won’t cause a severe crisis. Because the industry has stabilized. Many regional banks have stopped their capital outflows, and many large banks continue to make billions of dollars in profits.

Source :Blick