First Republic's final quarter: $100bn walks out the door

On 24 April, First Republic Bank finally published its first-quarter earnings report, and in doing so, laid bare the most catastrophic deposit run in modern commercial banking history. During the ninety days of the first quarter, the San Francisco-based lender suffered an astounding $102 billion in deposit outflows—representing more than half of its total deposit franchise—excluding the $30 billion emergency lifeline injected by Wall Street’s mega-banks. In a matter of weeks, First Republic’s business model had been completely eviscerated. The publication of this mathematical reality triggered a 50 per cent collapse in its remaining equity within twenty-four hours, forcing federal regulators into emergency preparations for the inevitable seizure.

The financial wreckage revealed in First Republic’s regulatory filings showed a zombie bank kept alive on life support. To plug the $100 billion deposit hole, the bank was forced to borrow over $100 billion from the Federal Reserve’s discount window and the Federal Home Loan Bank system.

The Negative Carry Guillotine

While First Republic had successfully prevented immediate liquidation, the cost of its replacement funding was devastating. The bank was paying market rates between 4.5 and 5.0 per cent for emergency wholesale advances, while its pristine portfolio of jumbo mortgages and long-dated municipal bonds earned an average yield of less than 3.5 per cent.

The bank was burning cash at a rate of millions of dollars per day. Its net interest margin had collapsed, its common equity was completely wiped out by mark-to-market losses, and no private buyer would acquire the balance sheet without an enormous government loss-sharing guarantee.

The Final Curtain

Management announced plans to slash headcount by 25 per cent and explore strategic alternatives, but these gestures were laughable against the scale of the capital hole.

Without an open-ended federal bailout of private equity holders, resolution was the only viable path. First Republic's final quarter proved that you cannot save a commercial bank once its depositors lose confidence; by the time $100 billion walks out the door, private restructuring is a fiction, and the only remaining question is how much the FDIC will have to pay a healthy peer to take over the corpse.