Power & Market

Banks are Still in Trouble

Jonathan Weil at the Wall Street Journal reports that Republic First Bancorp (not to be confused with First Republic Bank, which failed earlier this year) is in trouble.

It is suffering the same kinds of problems that sank Silicon Valley Bank, Signature Bank, and First Republic Bank in March 2023.

What’s funny is that even though Republic First is “about 0.2% the size of JPMorgan Chase by total assets,” commentators and regulators are saying it could pose a systemic risk due to the fact that 60% of its deposits are uninsured by the FDIC.

If regulators closed the bank without an acquirer in place to take over, that could mean significant losses for uninsured depositors. Regulators have said that such a failure could spur runs on other banks. 

Weil recalled Janet Yellen’s remarks during the banking crisis, in which she said that making exceptions by bailing out small banks and rescuing depositors above the FDIC’s $250,000 maximum would be considered on a case-by-case basis.

Like many other banks, and the Federal Reserve itself, the severity of the problem is hidden by accounting practices that ignore unrealized losses caused by higher interest rates.

In May, Republic First Bancorp, the bank’s holding company, said it would stop making interest payments on its debt. Earlier this year, it tried and failed to raise $125 million to shore up its finances. Its stock now trades for 30 cents a share on the over-the-counter marketplace, and its stock-market value is $21 million.

Republic First’s total equity, or assets minus liabilities, was $183 million as of June 30, according to its quarterly report with banking regulators. However, that excluded $304 million of unrealized losses on bonds that it labeled “held to maturity,” which means the losses don’t count on its balance sheet. The losses are the result of lower bond values, which declined when interest rates rose and could rebound if rates fell.

Republic First still hasn’t filed audited financial statements for 2022, which it blamed in part on its “former executive team’s failure to maintain adequate internal controls.” For regulatory purposes, the bank said it was well capitalized as of June 30. Silicon Valley Bank, Signature Bank and First Republic Bank all were deemed well capitalized shortly before they failed, based on their reported regulatory capital.

Read the full article here.

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