In a matter of a few days in March, First Republic Bank’s funding model has dramatically changed. Monday’sshowed that even with $30 billion deposits from America’s largest 11 banks, First Republic’s deposits in the first quarter of 2023 declined almost 41% from the fourth quarter of 2022. While other regional banks lost deposits, the decline at First Republic is far more significant than at other regional banks.Data from banks' earnings releases.
This massive change in the bank’s funding has not come cheaply. The bank’s interest expense rose by almost 86%. Unfortunately, due to its poor earnings performance and recent credit downgrades, First Republic’s cost of borrowing is likely to continue rising which means continued pressure on the banks net income.I heard many mixed messages during the earnings call.
As soon as I heard, “originating loans to sell,” I took it as a warning signal that we should question whether good underwriting standards will be enforced. I would hope by now that the 2007-2009 financial crisis taught us that when banks originate loans to sell them, they are not worried about borrowers’ credit quality. The risk will not be on the bank’s balance sheet, but risk never disappears. It gets transferred to the investor who buys the securitization backed by those loans.
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