April 29, 2023 / VOLUME NO. 259

Swinging and Missing the Ball

On Monday, I played tennis in the early evening with a local Meetup group. I kept swinging and missing the ball. Fortunately, the rules of this group force players to switch teammates regularly. A stronger teammate joined me to play doubles. That player never missed a ball. My confidence grew. Suddenly, I was racking up points. The final score was 6-0 in our favor.

The next day, I logged into my computer and saw that San Francisco-based First Republic Bank reported its first quarter 2023 earnings, and depositors had pulled $102 billion in deposits from the $233 billion asset bank during the quarter. The bank reported that deposits were stabilizing, and a $30 billion influx from large U.S. banks had helped mitigate the loss of funding. The bank also announced plans to restructure its balance sheet and reduce the need for short-term borrowings. Despite the emergency going on at the bank, executives took no questions from analysts.

The combination of silence and the fact that the bank had lost more than the expected deposits in the quarter hit investors hard, according to Christopher Marinac, director of research for the investment bank Janney Montgomery Scott, speaking to Bloomberg. By the close of the markets on Tuesday, First Republic’s stock had lost half of its value. On Wednesday, the stock continued to fall, causing several halts on trading. Investor worry was so pronounced, it spread to other regional banks that hadn’t reported such significant problems. The KBW Nasdaq Regional Banking Index fell to its lowest level since November 2020. 

Banks rely on confidence: confidence from depositors and confidence from investors. When depositors lose confidence, their money leaves the bank, which has happened in particularly strong fashion at institutions with high concentrations of uninsured deposits, such as First Republic, as well as Signature Bank and Silicon Valley Bank, both of which failed in March. When investors lose confidence, banks can struggle to raise capital and may be forced to sell assets at a discount, limiting their options in a crisis. 

But confidence also strengthens the U.S. economy, and unemployment remained low in March, at 3.5%. If investors, consumers and banks lose confidence in the U.S. economy, they may cut back on investing, spending and lending, leading to a spiral of shrinking economic activity. 

In banking and in business, a lack of confidence leads to a lot of swings and misses. 

• Naomi Snyder, editor-in-chief of Bank Director 

*This newsletter was last updated at 2 p.m. CDT Thursday. 

Hedging in the Spotlight After Banks Failed to Mitigate Interest Rate Risk

Banks that missed their opportunity to hedge their interest rate risk now have another opportunity, but it could cost them.

“Banks get to choose what risks they can take, and I think now more than ever, the idea of taking interest rate risk isn’t appealing.” — Isaac Wheeler, Derivative Path

• Kiah Lau Haslett, managing editor of Bank Director

Advancing Toward Operational Excellence Faster

The cost of banks not moving toward operational excellence could be a loss of market share, more customer churn and a higher rate of staff attrition.

Banking’s March Madness Postgame

March’s banking crisis is a reminder that risk management is highly interconnected among liquidity, interest rate, credit, capital and reputation risks.

Finding Opportunities in a Rising Interest Rate Environment

While the recent Fed actions certainly have negative implications for parts of the bank’s balance sheet, they also have some positive ones. 

What Banks Can Learn From Credit Unions

A well-designed banking cooperative can offer community banks a way to share benefits in the same way that many credit unions have long enjoyed.