Highlight of the Week
First Republic Customers Withdrew More than $100B in Q1
- The failures of Silicon Valley Bank and Signature Bank that caused a panic in the banking sector also led many of First Republic’s depositors to withdraw their funds from the bank
- First Republic reported in its Q1 earnings release that deposits fell 41% to $104.5 billion which is inclusive of the $30 billion deposited at First Republic by some of the largest banks such as JP Morgan in an attempt to stabilize the bank’s balance sheet.
- Deposits reportedly stabilized the week of March 27 and remained stable through April 21 only dropping 1.7% due to clients’ tax payments
- Looking forward, First Republic is taking steps to its insured deposits and reduce borrowings from the Federal Reserve Bank.
Commercial Real-Estate Woes Run Deeper Than in Past Downturns
- Currently, Landlords are facing falling commercial real estate values due to interest rate hikes at the same time as demand for office and retail is on the decline because of remote work trends and e-commerce
- In the past, when coming out of economic downturns commercial real estate has been a key contributor the growth of the economy, but the changing landscape could inhibit values from reaching the new heights in the same manner as before
- Some analysts are comparing the current state of the office space to the 1960s and 1970s when highways, fax machines, and cheap long-distance calls allowed for companies and individuals to move out of urban centers leading to a drastic decrease in demand for office real estate.
- The negative outlook for commercial real estate is bad news for Landlords, pension funds, asset managers, and banks. According to KBW research, commercial mortgages account for 38% of the median US Bank’s loan holdings.
Top Fed Official Signals Support for May Interest-Rate Increase
- New York Fed President John Williams stated in a speech “Inflation is still too high, and we will use our monetary policy tools to restore price stability”
- Analysts state that there is an 80% chance that the Fed raises interest rates by a quarter point at its May 2-3 meeting.
- Although the Fed has signaled greater uncertainty about the rate outlook due to the stress put on the banking sector, Williams stated that the banking system has stabilized, but lending standards would most likely tighten
FSOC floats new framework to tag nonbanks as systemically important
- Treasury Secretary Janey Yellen proposed a streamlined two-staged process aimed to make it easier to evaluate nonbanks for designation as systemically important.
- The first stage would involve a preliminary analysis based on available public and regulatory data, and a targeted company would be notified and allowed to submit relevant information.
- Nonbanks chosen for additional review would receive a more thorough evaluation in stage two which involves information collected directly from the company.
- This process is aimed at insurers, private equity firms, hedge funds & mutual companies, and crypto exchanges & brokerages.
- The FSOC will reevaluate prior decisions annually and allow companies to argue for or against a change in status.