First Republic shares fell 52% in early trading before storming back to near the previous day’s closing level, only to then finish the day down 15%. Investors expressed concerns about unrealized losses on assets at the bank as well as its heavy reliance on deposits that could turn out to be flighty.
Addressing its liquidity, First Republic said: “Sources beyond a well-diversified deposit base include over $60 billion of available, unused borrowing capacity at the Federal Home Loan Bank and the Federal Reserve Bank.” Regarding its financial position, First Republic said it “has consistently maintained a strong capital position with capital levels significantly higher than the regulatory requirements for being considered well-capitalized.”
Investors have grown wary of First Republic for reasons similar to those that caused concern at SVB. Like SVB, First Republic showed a large gap between the fair-market value and balance-sheet value of its assets. Unlike SVB, where the biggest divergence is in its portfolio of debt securities, First Republic’s gap mostly is in its loan book.
In its annual report, First Republic said the fair-market value of its “real estate secured mortgages” was $117.5 billion as of Dec. 31, or $19.3 billion below their $136.8 billion balance-sheet value. The fair-value gap for that single asset category was larger than First Republic’s $17.4 billion of total equity.
All told, the fair value of First Republic’s financial assets was $26.9 billion less than their balance-sheet value. The financial assets included “other loans” with a fair value of $26.4 billion, or $2.9 billion below their $29.3 billion carrying amount. So-called held-to-maturity securities, consisting mostly of municipal bonds, had a fair value of $23.6 billion, or $4.8 billion less than their $28.3 billion carrying amount.
Another point of concern that echoes SVB is First Republic’s liabilities, which rely heavily on customer deposits. At SVB, those deposits largely came from technology startups and venture-capital investors, who quickly pulled their money when the bank ran into trouble.
First Republic’s funding relies in large part on wealthy individuals who increasingly have a range of options to seek higher yields on their cash at other financial institutions as interest rates have risen.
Total deposits at First Republic were $176.4 billion, or 90% of its total liabilities, as of Dec. 31. About 35% of its deposits were noninterest-bearing. And $119.5 billion, or 68%, of its deposits were uninsured, meaning they exceeded Federal Deposit Insurance Corp. limits.
Uninsured deposits can prove flighty since they can be subject to losses if a bank fails.

Hopefully we all know or understand that holding bonds or CDs of various types can easily lead to a capital loss if we are required to sell those types of instruments before maturity, and if their value has meanwhile deteriorated due to overall financial market conditions.
But I had never given any thought to the possibility of potential bank losses when they have parked substantial amounts of their money in "ultra safe" US Treasuries. An article in this morning's WSJ pointed out that banks are potentially in the same situation as we are.
A bank such as Silicon Valley Bank can have a significant amount of their capital in short-term "safe" Treasuries, but if they are faced with an unexpected run on their deposits, they can be forced to sell those Treasuries before maturity, and at a loss.
So even a reasonably run bank can get into trouble.

A new bank, the National Bank of Santa Clara, has been created by the Federal Deposit Insurance Corp. to hold the deposits and assets of Silicon Valley Bank, and it will begin operating by Monday. But only accounts that fall below $250,000 are insured by FDIC; any winery with funds above that will have to wait an undetermined amount of time to find out if the additional amount will be paid back, partially or in full.