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First Republic Bank and The Regional Banking Crisis in the USA

First Republic Bank Crisis
Written by Andy


Someone asked:

First Republic has ~$130B real estate loan book which is fairly liquid, which exceeds the amount of uninsured deposits (~$119B). With the $30B coming in on top of $34B of existing cash, they look pretty healthy to me. If all the VCs pull their money out they will have to pay off their $10B in lines, which would be another $10B of cash.


  1. Residential real estate loans that were issued at cheap fixed interest rates is a problem now that rates have risen.
  2. Lending to office real estate is likely a problem as the return to work is not happening fully
  3. Loss in value of MBS and treasuries is mark to market, is also a problem.
  4. Wait to consider unrealized losses due to duration in that book. It is more than $20bn loss in their Q4 financials. Separately HTM loss on securities.

A prolonged period of zero interest rates was supposed to lead to economic recovery after the mortgage crisis. But when the shock and awe sanctions on Russia literally squeezed supplies of vital commodities, inflation kicked in. Unfortunately the Fed used the only tool it knew to calm inflation: raise rates. But this unfortunately exposed the systemic risk associated with the Repo market and derivatives. Result, as others have said: unintended consequences. America is so obsessed with gambling and making money it has lost sight of reality.

One of the issues in the US has been the banks not passing on higher rates of interest on deposits. As mentioned in comments here already money now can be moved pretty instantly. A raising of deposits rates would /will stem the outflows but impact the banks Net Interest Margin. You can buy 1 month US T-Bills every week which were yielding mid 4%.

Two things that hurt the market this week… and nothing to do with banks.

Biden said everything was fine. We know what that means in ‘doublespeak.’

Yellen said everything was okay. We know what that means in double speak.

But some solid banks got slammed this week.

The 2-year US Treasury Yield is flagging a worsening financial crisis. The Fed has backstopped all depositors of financial institutions but not the troubled banks. I don’t think this is just about the near term risk in the banks it’s how this developing crisis is furthering the shutdown of money availability. The Fed’s Senior Loan Office Survey was already at a level suggesting recession. Whilst many are focused on the events with regional banks I think the new risk is when investors have to mark their private equity & venture holdings to current market. The Fed has raised rates into a generationally levered system . The risk is not what you can see, it’s what you cannot see.

Here’s the crux of the issue: Hundreds of banks, both big and small, have so-called “unrealized losses” on their books — $620 billion in total according to the WSJ.

Those unrealized losses are due mostly to the lower value of long-term Treasury bonds and MBS securities. The banks in trouble aren’t using “mark-to-market” accounting for those assets…pretending instead that they’re still worth par value when in fact they’re worth more like 80 cents on the dollar due to rapidly rising interest rates in the past 12 months.

If there’s a rapid withdrawal of depositor money, those banks will face a liquidity crisis. Janet Yellen set up a new program last weekend called the “Bank Term Funding Program” to provide liquidity in return for long-term bonds. This program PRETENDS that 10-year bonds haven’t fallen in value at all — magic accounting. Unfortunately, she allocated only $25 billion to this new program, hardly enough considering the $620 billion overhang of “unrealized losses” in the U S. banking system. Yikes!

Bottom line for the fed is, they got this box with one knob on it. If they turn it this way, banks will go down like dominoes. If they turn it that way, inflation goes to 12%. If they don’t turn it at all, some people with begin to ask why we need 3000 PhDs with fat six figure salaries doing nothing. End game.

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