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Bank Crisis in Remission But Not Over

Companies and Markets

By Sean Ryan  |  April 26, 2023

TL;DR: The Federal Reserve data last week again showed that while the banking system has largely stabilized relative to mid-March, reliance on liquidity from the Fed remains elevated. A fresh wave of credit downgrades from Moody’s underscored the persistence of liquidity risks. The reaction to Western Alliance’s nominally positive pre-announcement showed how skeptical the market remains, and while not all banks have reported Q1 results yet, earnings thus far have highlighted rising pressure on net interest margins and persistent HTM losses, even before the credit cycle has begun in earnest. First Republic’s results underperformed even the bears’ expectations. This report also highlights banks impacted by the BBBY bankruptcy, and an academic paper on the role of Twitter in the March bank runs.

A new wave of bank credit downgrades. On April 21, Moody’s downgraded several banks, including Western Alliance and First Republic. The full list contains a by-now-familiar group of banks that were among the worst-performing in mid-March, reflecting particularly high concerns about uninsured deposits and unrealized losses.


Western Alliance’s pre-announcement highlights investor nervousness. While the panic of March has passed, there remain plenty of reminders that banks are not out the woods, and the relative calm of April may be just a temporary respite. On April 5, Western Alliance (WAL) released a partial pre-announcement, with March 31 deposit totals and some useful color on flows; while the data on its face was encouraging, the stock dropped like a stone. The pre-announcement only stoked market concerns about what wasn’t being pre-announced. When Chairman Bob Sarver looks back on the past year, that is unlikely to be the misstep that stands out, but it does drive home the point that bank investors remain skeptical, and bank managements can’t expect the benefit of the doubt.

First Republic: It really is that bad. First Republic reported first quarter earnings after the close on April 24; the earnings call began at 4:30pm and wrapped up at 4:42pm with no questions taken. Diving into the financial data reveals nothing that can’t be readily deduced from the aforementioned metadata, but since financial data is FactSet’s stock-in-trade, let us take the belt-and-braces approach:

  • Funding situation is far worse than the headline deposit outflows suggest. First Republic’s total deposits fell by 41% in Q1. That’s the good news. The less good news is that this includes the $30 billion deposited by 11 ostensible competitors, but absent that aberrant inflow, total deposits by actual customers fell 58% since year-end 2022. The really bad news, however, is First Republic’s funding mix shift. Noninterest bearing deposits fell 68%, and the hole was filled by CDs – up 98% with an average rate of 2.93% in Q1 – and short term FHLB advances – up 10-fold, with an average rate of 4.80% in Q1. Even holding Q1 rates flat, the mix shift alone effectively doubles their funding costs.

  • It may get worse still. First Republic’s website currently offers 60-day CDs with a 4.75% APY, 5-month CDs with a 4.95% APY, and 8-month CDs that permit penalty-free early (partial) withdrawals with a 4% APY. With a 25bp Fed Funds hike expected on May 3, those market-based funding rates are likely to move higher in tandem. These CD rates are, at best, a double edged sword. Maturing CDs, if they are retained at all, will be retained at higher rates, pulling that average 2.93% rate higher. The one comparatively bright spot is the potential to grow the CD book enough to materially pay down the even-more-costly FHLB advances.


Adverse selection in wealth management. Management tried to put a positive spin on the performance of First Republic Investment Management, the bank’s wealth management arm. The first quarter saw net inflows of $11 billion, “teams that have departed were responsible for less than 20% of total wealth management assets as of March 31, 2023,” and “First Republic has retained nearly 90% of wealth professionals.” While those talking points may sound reassuring, investors should take little solace. Deposits, as we saw clearly in March, can flow out on a moment’s notice. Financial advisors and AUM move more slowly; when pulling your deposits out of a bank suffering a run, just about any alternative will do, at least in the short run. Financial advisors contemplating career moves must act with more deliberation. Inflows before mid-March would have reflected FRIM’s previous success in attracting FAs, but that stopped cold in March. Losing 10% of your FAs accounting for 20% of AUM means First Republic is being adversely selected – their highest performers are the ones leaving. That process only began at the end of March and continues this week. The 68% decline in non-interest bearing deposits is probably a good proxy for the bank’s capacity to generate wealth referrals, which had been an attraction for many FAs who joined First Republic in recent years.

First Republic raises policy questions. The most obvious is, given the bank’s condition, on what basis has it been permitted to continue operating? Perhaps management (and regulators) have some reason to believe the liquidity and solvency problems aren’t as severe as the earnings release suggests, but if so then it seems curious that they’re keeping it to themselves. There is also the question of the $30 billion in deposits from other banks – if this was the banks’ idea then there are competitive and fiduciary questions to be answered, and if it was regulators’ idea, then the precedent of using of too-big-to-fail banks’ deposits as an off-the-books regulatory slush fund would be very ominous, and one that we all, sooner or later, would have cause to look back on with regret. Moreover, with $30 billion of uninsured large banks’ deposits at risk, any resolution of First Republic that draws on FDIC or other public resources is certain to be characterized by many as a bailout of those large banks. The semantics will be debatable; the corrosive effect on public discourse and sentiment will not be.

Which banks are impacted by Bed Bath & Beyond’s bankruptcy? In light of the bankruptcy of retailer Bed Bath & Beyond, a pair of banking relationships seem worth noting. The largest unsecured claim listed on the petition (and the only claim other than trade payables) is $1.18 billion in unsecured bonds, with Bank of New York Mellon the listed creditor. Bed Bath & Beyond also partnered with Bread Financial (BFH), parent of Comenity Bank, for store-branded credit cards. Comenity is the issuer of both the Bed Bath & Beyond store credit card, and the general purpose Bed Bath & Beyond Mastercard. While we anticipate the impact to be entirely manageable, we would expect it to be on the agenda when Bread reports first quarter results on April 27.

Social media as a bank run catalyst. On Monday, a group of academics released a timely study entitled "Social Media as a Bank Run Catalyst." It should not be taken as the definitive word on the topic; the study covers only the most recent bank crisis, which is a relevant but small sample. Some also may regard the conclusions as banal. A public real-time channel of networked communication spread concerns about banks across the Bay Area faster than if VCs had been required to write out their concerns on parchment with quill pens and send them off via carrier pigeon; this observation doesn’t meaningfully advance the frontier of human knowledge. Moreover, certain VCs we shall not name managed to pour plenty of fuel on the fire through (relatively) old fashioned television interviews. Nonetheless, it is a topical question, the authors address it competently, and the paper is worth a read.


April 19 Federal Reserve balances suggest stabilization. Figure 4 highlights the key data points from last week’s release of Federal Reserve balances (Release H.4.1). Combined bank usage of the Discount Window and the BTFP ticked up 3.2% to $144 billion; while very elevated, this is still 13% below the March 15 peak.



Money market assets dip. Money market assets actually dropped last week for the first time since the bank crisis, dropping $69 billion (1.3%).


Decline in total commercial bank deposits continuing. After an unusual uptick the prior week, total deposits resumed their decline in the week ended April 12, down $76 billion (44bps) but with outflows much greater at large banks (42bps) than small ones (9bps). With at least one more Fed Funds hike expected, this trend is unlikely to reverse in the near term; what remains to be seen is whether the pace continues to reflect an orderly unwinding of the ZIRP- and COVID-driven surge in deposits, or returns to the panic-driven acceleration of March.



Total loans rose nominally. Total loans were up $14 billion (11bps) in the week ended April 12, which left them up 20bps 2Q-to-date, which translates to about 6% annualized growth. C&I loans accounted for just over half of the growth, both on the week and quarter-to-date. Commercial real estate loans were flat both for the week and quarter-to-date – too small a sample size to support any grand conclusions but entirely consistent with everything else we know about the CRE market (and also notable for the deceleration, as total bank CRE loans remain up by over 10% over the past year).



What We’re Watching

Key upcoming data. As financial sector earnings continue, with banks winding down and insurance and specialty finance picking up, we also look forward to the Fed’s review of regulation of SVB Financial, expected on May 1, the quarterly Senior Loan Officer Opinion Survey (SLOOS) which may offer some additional insight into the effect of the bank crisis on both lending standards and loan demand, and of course the May 3 FOMC Meeting, which is expected to yield another 25bp hike, pressuring bank margins further. The upcoming Gulf South conference on May 8-9 may also be especially interesting this year, in light of recent events.



This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.



Sean Ryan, CFA


Mr. Sean Ryan is the VP/Director for the banking and specialty finance sectors at FactSet. In this role, he guides the development of FactSet’s deep sector offering in these areas. He joined FactSet in 2019 and prior to that, he covered bank and specialty finance stocks for brokers including Lehman Brothers and Bear Stearns and for sector-focused hedge funds FSI and SaLaurMor Capital. Mr. Ryan earned a Bachelor of Science in industrial and labor relations from Cornell University. He is a CFA charterholder.


The information contained in this article is not investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.