First Republic Bank: The Crucial Next Steps Towards Stability

In the coming days, First Republic Bank (FRC) faces a make-or-break moment as the White House, Federal Reserve, and Treasury weigh options to rescue the struggling regional lender. The proposed “open bank” rescue plan involves creating a special purpose entity, backed by big banks that have already deposited $30B in support of FRC. The entity would then purchase FRC’s underwater loans above their marked value, potentially freeing up the bank to raise new equity.

In addition, FRC is considering selling off $50B-$100B of long-term securities and mortgages as part of a larger restructuring effort to address the bank’s asset-liability mismatch. To incentivize purchases above market value, the bank may offer warrants or preferred equity. FRC is taking these measures to shore up its balance sheet, stave off a regulatory takeover, and position itself for a possible capital raise.

To reduce costs, FRC plans to cut its workforce by 20%-25% in Q2 and streamline its corporate office space. Despite support from 11 of the largest U.S. lenders, the bank reported net deposit outflows of $72 billion in Q1 as customers fled. The next steps taken by FRC and its supporters will be critical in determining the bank’s fate.

According to Eugenio Catone, a contributor to SA, the deposit structure of First Republic has undergone a complete change in just three months. He expressed concern about the bank’s ability to recover despite continued support from the Fed, and warned that it would be misplaced to believe that the stock price would return to its levels from three months ago. Stone Fox Capital, the leader of the Investing Group, believes that the stock price of First Republic will not see an uptick until the bank’s flawed business model is corrected.