Shares in America's First Republic Bank's crashed when the New York stock market opened for trading this morning. The crash was triggered by a statement issued on Sunday night that sought to ease investor worries about the bank's liquidity situation in the wake of the failure of Silicon Valley Bank. Shares in the San Francisco based regional bank are down 60% on last week's close.
In the Sunday night statement the bank claimed that it had more than $70 billion in unused liquidity to fund operations from agreements that included the Federal Reserve and JPMorgan Chase & Co.
"The additional borrowing capacity from the Federal Reserve, continued access to funding through the Federal Home Loan Bank, and ability to access additional financing through JPMorgan Chase & Co.increases, diversifies, and further strengthens First Republic's existing liquidity profile," the bank said, adding that more liquidity is available through the Fed's new lending facility.
Unfortunately this information, coming only days after Silicon Valley Bank had issued similar assurances shortly before being declared insolvent, failed to assure investors and depositors.Bloomberg's Ven Ram opined, "The plunge in its shares is classic market psychology at work, with investors starting to question the credentials of any lender that may be remotely in the same category of Silicon Valley Bank," .
Zero Hedgepointed out over the weekend, "as a result of the SVB failure - one look at what is already taking place at some smaller, vulnerable banks such as this First Republic Branch in Brentwood should be sufficient to see what comes to morrow if the Fed makes the wrong decision today."
Despite the emergency lending program announced by the Fed and Treasury on Sunday to increase the availability of funds to meet bank withdrawals and prevent runs on other banks, fears have not been alleviated as other regional banks, which are sitting on some $620 billion in unrealized losses on all securities (both Available for Sale and Held to Maturity) at the end of last year, according to the Federal Deposit Insurance Corp," continue to experience significant pressure."
How was this allowed to happen? I worked in a British financial institution and do not claim great expertise in the American way of doing things but one flaw in U.S. corporate law allows companies to skew their balance sheet with outmoded accounting methods which maintain asset values at the original level rather than using the more modern, (and better suited to current financial volatility,) mark to market, in which market values current at the closing of an accounting period are used. Thus a company may claim $100 billion in assets against only $75 billion in liabilities, but when assets are calculated to market values only have assets with actual worth of $70 billion thus being insolvent.
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