U.S. Bank Crisis Looms as First Republic Bank Faces Massive Withdrawals

First Republic Bank’s stock plummeted by 49% on Tuesday and over 30% on Wednesday as depositors continued to withdraw their money from the bank, losing confidence in its financial stability. The stock closed at $5.68 on Wednesday, marking a staggering 95% drop this year from a peak of $170.

On Tuesday, the bank reported that more than $100 billion had been withdrawn by depositors in the past month. The primary reason for this massive withdrawal was the recent failure of Silicon Valley Bank and Signature Bank.

First Republic Bank managed to weather the financial crisis because large banks provided $30 billion in uninsured deposits. As of April this year, the bank has deposits valued at only $102.7 billion. This shocking revelation from the quarterly earnings report alarmed banking circles, as the decrease in deposits exceeded expectations. Even more concerning, the bank’s representatives refused to answer questions from the media after releasing the results.

Meanwhile, US bank regulators are considering downgrading the bank’s private investments. In response, the bank is selling some of its assets and planning to lay off a significant number of its over 7,000 employees. The bank is also contemplating cutting executive salaries and even renting out real estate space to generate additional income.

Attracting a buyer may prove difficult for the struggling bank. Other banks might wait for First Republic Bank to fail before swooping in to purchase assets at rock-bottom prices, rather than bidding while the bank is still operational.

However, if First Republic fails, it could spell disaster for the banks that recently lent it $30 billion to help it survive. On one side, the bank needs to reassure depositors that their money is safe, while on the other hand, it needs to convince investors that it can successfully navigate this crisis.

A more significant concern is that customers might withdraw deposits from other mid-sized banks similar to the First Republic. If this trend spreads to other banks, it could lead to a reduction in new loans and ultimately contribute to an economic downturn in the US. The Federal Reserve may already be considering pausing interest rate increases. Although the bank insists that it is “fully operational” and capable of serving its customers, US regulators are urging it to find a solution to improve its balance sheet.

The alarming pace of bank collapses in the US has worried regulators. For instance, Silicon Valley Bank’s deposits went from $42 billion to nothing in under a day.Recent reports indicate that days before the Silicon Valley Bank and Signature Bank ultimately failed, US financial regulators received warnings from trade groups that these banks were under extreme stress, and their failure would lead to a crisis. However, regulators did not take these warnings seriously enough to act on them.

In addition, US stocks mostly fell on Wednesday due to recession fears. The Dow Jones dropped 0.7%, and the S&P 500 declined 0.4%. However, the Nasdaq climbed 0.7%, thanks to strong performances from tech stocks such as Microsoft Corp. and Alphabet.

The declines on Wall Street were echoed in the Japanese market, with shares falling on Wednesday mainly due to concerns about the health of the banking sector. In general, Asian shares were lower on Wednesday, driven by fears of an economic downturn. Consequently, these events highlight the precarious nature of the global financial system and the need for vigilance and proactive measures to mitigate risks.