With more banking turmoil in the headlines, we want to offer some helpful context about the collapse of First Republic Bank, and a brief reminder about our objectives as a long-term investment firm.
What Happened to First Republic Bank
As the events of Silicon Valley Bank (SVB) and Signature Bank of New York unfolded in March, First Republic shares began to fall, as many deemed it SVB’s closest peer. However, First Republic and other regional banks held mostly steady amidst quiet trading into April after the shock of SVB.
Ultimately, though, First Republic’s earnings reported on April 24th were a dagger for the troubled institution, showing its deposits fell 40.8% in the first quarter.
The deposit outflows resulted in reports that the Biden administration was scrambling to find a solution, and the stock traded down to $8, nearly 95% below its early March share price.
First Republic Seized, Acquired
First Republic officially became the second-largest bank failure in American history on May 1, 2023, replacing the reigning silver medalist, Silicon Valley Bank.
First Republic stock was delisted on the New York Stock Exchange (NYSE) on Tuesday, May 2, 2023, days after the institution was seized by regulators and most of its assets were acquired by JPMorgan Chase & Co. for $10.6 billion.
The third failure of an American bank since March has investors rightfully scratching their heads.
Another Bank Failed. More On The Way?
“This part of the crisis is over,” said JPMorgan Chase & Co. CEO Jamie Dimon after his bank’s acquisition of First Republic.
However, on the same day – and the day before the May Federal Reserve interest rate announcement – shares of PacWest Bancorp and Western Alliance Bancorporation were in focus as they both fell sharply.
Is This Like 2008?
No, it is not. It is fair to say that there is a regional banking crisis, but many differences exist between the present landscape and 2008.
In 2008, a wide variety of institutions were overleveraged and owned complex subprime mortgage-backed securities that turned out to be worth a lot less than they anticipated. These were bad loans.
At present, the situation is much different and is instead tied to rising interest rates.
Higher Rates, Mortgage Losses
First Republic could have managed its risk better, and it had the wrong business model in place before interest rates rose. But rising interest rates ultimately caused the steep losses in value and ultimate collapse that First Republic experienced.
Remember, bond prices and interest rates have an inverse relationship. When interest rates rise, bond values fall. And when you are a bank like First Republic or Silicon Valley Bank holding long-term debt (like mortgage bonds), the value of these assets deteriorates as interest rates rise.
When investors and depositors with deep pockets catch wind of a bank holding large amounts of deteriorating asset values that they may be forced to sell, they often pull their money out. This dynamic can create a bank run, and it did.
It is a fair statement that the recent turmoil in regional banks may not have occurred if the Fed did not raise rates so sharply or so quickly. But, on the flip side, inflation is plaguing Americans, which is why the Fed has hiked interest rates. In this case, it seems the solution to one problem has been the cause of another.
Remaining Objective
We seem to be at a pivotal point for financial markets, amid rapidly rising interest rates, sticky inflation, regional banking system issues, debt ceiling woes, and other headwinds. Yet, the broadest measure of the U.S. economy, the S&P 500, has remained resilient thus far in 2023.
Should the broader markets experience a pullback on the heels of banking woes, opportunities could arise for long-term investors with certain risk tolerances and investment time horizons.
On that note, let’s remember our long-term investing mission, regardless of the news. I’ll leave you with a weekly chart of the S&P 500 from 2000 until now. Emotional investors that lost their resolve after the 2000 tech bubble, the 2008 financial crisis, and the 2020 pandemic have missed out on a U.S. economy that has moved from the bottom left corner to the top right corner of the chart. The data matters!
With that said, we understand recent months have been stressful for many Americans. If these events are on your mind, let’s touch base. We are happy to talk with you further about the economy, the markets, and your portfolio. Reach out by phone or email anytime.
Take care,
Breaking Market Commentary | Banking Uncertainty
With more banking turmoil in the headlines, we want to offer some helpful context about the collapse of First Republic Bank, and a brief reminder about our objectives as a long-term investment firm.
What Happened to First Republic Bank
As the events of Silicon Valley Bank (SVB) and Signature Bank of New York unfolded in March, First Republic shares began to fall, as many deemed it SVB’s closest peer. However, First Republic and other regional banks held mostly steady amidst quiet trading into April after the shock of SVB.
Ultimately, though, First Republic’s earnings reported on April 24th were a dagger for the troubled institution, showing its deposits fell 40.8% in the first quarter.
The deposit outflows resulted in reports that the Biden administration was scrambling to find a solution, and the stock traded down to $8, nearly 95% below its early March share price.
First Republic Seized, Acquired
First Republic officially became the second-largest bank failure in American history on May 1, 2023, replacing the reigning silver medalist, Silicon Valley Bank.
First Republic stock was delisted on the New York Stock Exchange (NYSE) on Tuesday, May 2, 2023, days after the institution was seized by regulators and most of its assets were acquired by JPMorgan Chase & Co. for $10.6 billion.
The third failure of an American bank since March has investors rightfully scratching their heads.
Another Bank Failed. More On The Way?
“This part of the crisis is over,” said JPMorgan Chase & Co. CEO Jamie Dimon after his bank’s acquisition of First Republic.
However, on the same day – and the day before the May Federal Reserve interest rate announcement – shares of PacWest Bancorp and Western Alliance Bancorporation were in focus as they both fell sharply.
Is This Like 2008?
No, it is not. It is fair to say that there is a regional banking crisis, but many differences exist between the present landscape and 2008.
In 2008, a wide variety of institutions were overleveraged and owned complex subprime mortgage-backed securities that turned out to be worth a lot less than they anticipated. These were bad loans.
At present, the situation is much different and is instead tied to rising interest rates.
Higher Rates, Mortgage Losses
First Republic could have managed its risk better, and it had the wrong business model in place before interest rates rose. But rising interest rates ultimately caused the steep losses in value and ultimate collapse that First Republic experienced.
Remember, bond prices and interest rates have an inverse relationship. When interest rates rise, bond values fall. And when you are a bank like First Republic or Silicon Valley Bank holding long-term debt (like mortgage bonds), the value of these assets deteriorates as interest rates rise.
When investors and depositors with deep pockets catch wind of a bank holding large amounts of deteriorating asset values that they may be forced to sell, they often pull their money out. This dynamic can create a bank run, and it did.
It is a fair statement that the recent turmoil in regional banks may not have occurred if the Fed did not raise rates so sharply or so quickly. But, on the flip side, inflation is plaguing Americans, which is why the Fed has hiked interest rates. In this case, it seems the solution to one problem has been the cause of another.
Remaining Objective
We seem to be at a pivotal point for financial markets, amid rapidly rising interest rates, sticky inflation, regional banking system issues, debt ceiling woes, and other headwinds. Yet, the broadest measure of the U.S. economy, the S&P 500, has remained resilient thus far in 2023.
Should the broader markets experience a pullback on the heels of banking woes, opportunities could arise for long-term investors with certain risk tolerances and investment time horizons.
On that note, let’s remember our long-term investing mission, regardless of the news. I’ll leave you with a weekly chart of the S&P 500 from 2000 until now. Emotional investors that lost their resolve after the 2000 tech bubble, the 2008 financial crisis, and the 2020 pandemic have missed out on a U.S. economy that has moved from the bottom left corner to the top right corner of the chart. The data matters!
With that said, we understand recent months have been stressful for many Americans. If these events are on your mind, let’s touch base. We are happy to talk with you further about the economy, the markets, and your portfolio. Reach out by phone or email anytime.
Take care,