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SVB had some idiosyncrasies with its customer base that most banks don't, so I understand why it failed. I didn't think First Republic was big in the startup s

SVB had some idiosyncrasies with its customer base that most banks don't, so I understand why it failed. I didn't think First Republic was big in the startup space, so I'm curious what got them. I know they hold a lot of mortgages on their own books, but other than that, was it just another bank run? Was it exasperated by their customer base becoming very aware of FDIC limits and the potential of failures because SVB was in the same region? The median Fifth Third customer doesn't have $250k, and sees all of this as "rich silicon valley problems."

remote_phone 4y ago
First republic had a lot of high net worth individuals. Similar to SVB their high bank balance made a percentage of them moving away very damaging and it looks like it accelerated. With a regular bank, you would have much smaller accounts so a proportional number of accounts leaving Wells Fargo would have less of an effect.
blake1 4y ago
It was mainly just the mortgages. The quirk is that they marketed to extremely high-net worth homeowners—I think this is the penthouse condo crowd. In order to attract them, they offered 3% interest-only loans. Without principal pay down, these mortgages are more sensitive to interest rate rises, leaving the bank with roughly $35bn in losses as interest rates have been rising. They have been insolvent for several months, but a typical bank didn’t have losses on their mortgages which were nearly so steep. As compared to SVB, this is the same basic situation: interest rate losses led to insolvency, which could be temporarily ignored because they were “small” banks. However, once deposits started fleeing, the losses could not be ignored when they needed to sell the impaired assets for actual cash. They have been in limbo for a few weeks thanks only to the injection of $30bn from other banks. Another similarity in the two banks’ situations is that the same catalyst of rising interest rates cause asset losses and drive deposit flight. It’s a weird quirk of accounting that they are allowed to ignore these losses for the life of the assets. But the other extreme is weird too, because sometimes the market value of assets can undergo a “V” shaped dip before recovering, and it would be bad to make a bank insolvent because some flash crash. The accounting rules try to split the difference by letting the bank partition its assets into buckets that take losses immediately, or at the end of life of the asset. This is an easily abused system. It seems, hopefully, that the three failures were exceptionally badly run banks, and that this doesn’t indicate a wider wave of bank failures. Not yet.
- in_cahoots 4y ago
  Genuinely curious: How are these mortgages more sensitive to interest rate rises than average? I’m sure I’m missing something but it seems like a mortgage on the books is a done deal, so long as the homeowner pays up.
  - SamReidHughes 4y ago
    Because the principal isn't paid down, the weight of the future loan repayments is more years away, and they get more affected by interest rate changes.
    - makomk 4y ago
      In theory that's true, but a substantial proportion of all US mortgages are fixed rate and originated in the last few years when interest rates were at record lows, so they're still going to be pretty sensitive to interest rate changes and the bulk of the repayments still pretty far into the future assuming they're structued in the usual way with fixed repayments.
      - deleted 4y ago
        [deleted]
    - blake1 4y ago
      Exactly. As an example, a typical 30-year fixed will be halfway paid off after 15 years, and so is about half as sensitive to interest rates as a 30-year interest-only. This should not be a surprise to the management of First Republic.
- jsemrau 4y ago
  Wild. I wrote a "junior equity analyst" autonomous agent and this was the reply a couple of days ago "First Republic Bank's growth prospects may be limited by its narrow focus on high net worth clients, which may not provide sufficient diversification in the event of an economic downturn. Additionally, the bank's high cost structure and low efficiency ratio may make it vulnerable to margin compression and increased competition. Finally, the bank's exposure to the California real estate market may pose significant risks in the event of a housing market downturn. "

remote_phone 4y ago

First republic had a lot of high net worth individuals. Similar to SVB their high bank balance made a percentage of them moving away very damaging and it looks like it accelerated. With a regular bank, you would have much smaller accounts so a proportional number of accounts leaving Wells Fargo would have less of an effect.

blake1 4y ago

It was mainly just the mortgages. The quirk is that they marketed to extremely high-net worth homeowners—I think this is the penthouse condo crowd. In order to attract them, they offered 3% interest-only loans. Without principal pay down, these mortgages are more sensitive to interest rate rises, leaving the bank with roughly $35bn in losses as interest rates have been rising. They have been insolvent for several months, but a typical bank didn’t have losses on their mortgages which were nearly so steep. As compared to SVB, this is the same basic situation: interest rate losses led to insolvency, which could be temporarily ignored because they were “small” banks. However, once deposits started fleeing, the losses could not be ignored when they needed to sell the impaired assets for actual cash. They have been in limbo for a few weeks thanks only to the injection of $30bn from other banks. Another similarity in the two banks’ situations is that the same catalyst of rising interest rates cause asset losses and drive deposit flight. It’s a weird quirk of accounting that they are allowed to ignore these losses for the life of the assets. But the other extreme is weird too, because sometimes the market value of assets can undergo a “V” shaped dip before recovering, and it would be bad to make a bank insolvent because some flash crash. The accounting rules try to split the difference by letting the bank partition its assets into buckets that take losses immediately, or at the end of life of the asset. This is an easily abused system. It seems, hopefully, that the three failures were exceptionally badly run banks, and that this doesn’t indicate a wider wave of bank failures. Not yet.

in_cahoots 4y ago
Genuinely curious: How are these mortgages more sensitive to interest rate rises than average? I’m sure I’m missing something but it seems like a mortgage on the books is a done deal, so long as the homeowner pays up.
- SamReidHughes 4y ago
  Because the principal isn't paid down, the weight of the future loan repayments is more years away, and they get more affected by interest rate changes.
  - makomk 4y ago
    In theory that's true, but a substantial proportion of all US mortgages are fixed rate and originated in the last few years when interest rates were at record lows, so they're still going to be pretty sensitive to interest rate changes and the bulk of the repayments still pretty far into the future assuming they're structued in the usual way with fixed repayments.
    - deleted 4y ago
      [deleted]
  - blake1 4y ago
    Exactly. As an example, a typical 30-year fixed will be halfway paid off after 15 years, and so is about half as sensitive to interest rates as a 30-year interest-only. This should not be a surprise to the management of First Republic.
jsemrau 4y ago
Wild. I wrote a "junior equity analyst" autonomous agent and this was the reply a couple of days ago "First Republic Bank's growth prospects may be limited by its narrow focus on high net worth clients, which may not provide sufficient diversification in the event of an economic downturn. Additionally, the bank's high cost structure and low efficiency ratio may make it vulnerable to margin compression and increased competition. Finally, the bank's exposure to the California real estate market may pose significant risks in the event of a housing market downturn. "