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U.S. Banking Crisis: Expert Says Republic First Collapse…Won’t Be Last

Isaac Nuriani    |
May 3, 2024
  • Republic First had $262 million in unrealized losses against $96 million in equity.
  • Key Federal Reserve liquidity program expired in March.
  • Expert says Republic First failure suggests others will follow.
  • New research says close to 300 banks could be at risk.
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Recently, economist Lynette Zang made the following startling declaration reflecting on what has come to be called a U.S. banking crisis:  

“Every single bank – including every central bank – is insolvent.”[1] 

To clarify, Zang was referring to technical insolvency, which is a concept we’ve been hearing about since central banks the world over began hiking interest rates from near-zero a couple of years ago. The concept is that the impact of the rate increases on the vast bond and loan portfolios held by banks has generated unrealized losses on these holdings for the banks of such a magnitude that all financial institutions, as a result, are underwater.  

Even if Zang herself suspects she’s being at least a little hyperbolic, it’s difficult to dispute that a lot of banks are under the gun due to rate pressures. Those pressures played a material role in the highly publicized downfalls a year ago of Silicon Valley Bank, Signature Bank and First Republic Bank – which, as it turned out, became three of the four largest bank failures in U.S. history. 

Despite all the banks ostensibly in distress from rate pressures, we didn’t get the wave of failures over the past 12 or so months that you might expect, considering all of the underwater banks. 

A big reason, for that, say experts, was the Bank Term Funding Program – an out-of-thin-air creation of the Federal Reserve that served as an emergency lending program to banks with “drowning” bond portfolios. 

Until a little over a month ago, that is. The program was shut down in March.[2] And lo and behold, on the heels of that closure, we have the first failure of the year of an FDIC-insured bank: Philadelphia-based regional lender Republic First. 

Hardly a reassuring sign, considering the number of banks analysts such as Zang suggest are hanging on by a thread.  

Another of those particularly concerned is a renowned banking-industry attorney who says the collapse of Republic First could very well signal the beginning of “round 2” in volatility throughout the part of the banking industry comprised of smaller and regional banks.  

This week, we’re going to take a closer look at what he has to say. We’re also going to look at recent projections suggesting that as many as hundreds – potentially several hundred – banks are currently at risk of outright failure from the pressures exerted by higher interest rates as well as the struggling commercial real estate sector. 

That may sound like acutely provocative speculation. But it’s not without basis. The fact is that the elevated interest rates which lie at the root of so much of the pressure being felt by banks remain elevated. What’s more, with analysts increasingly considering the possibility that there might not be any rate cuts this year, higher rates – and the tremendous pressure they’re putting on banks – could very well persist for some time to come.[3] 

“As the memory of last year’s regional banking crisis begins to fade,” CNBC noted recently, “it’s easy to believe the industry is in the clear. But the high interest rates that caused the collapse of Silicon Valley Bank and its peers in 2023 are still at play.”[4] 

Banking Analyst: Republic First Collapse Signals “Additional Failures Will Occur” 

In what the Wall Street Journal called the “fourth high-profile bank failure since last spring,” regulators seized Republic First Bancorp a week ago Friday. The Pennsylvania Department of Banking and Securities shuttered the doors of the bank, the control of which was assumed by the Federal Deposit Insurance Corporation (FDIC). The federal regulator subsequently sold the bank to another regional lender, Fulton Financial.  

As for what led to the downfall of Republic First, it’s basically the same set of conditions that felled Silicon Valley, Signature and First Republic (not to be confused with Republic First, the bank at issue now) last year: unrealized losses on the bank’s bond portfolio along with a high dose of uninsured deposits. According to the FDIC, roughly half the bank’s deposits were uninsured.[5]  

In the case of Republic First, the stresses caused by rising rates and unrealized bond portfolio losses were intensified by the bank’s portfolio of commercial real estate loans. The bank had roughly $6 billion in total assets as of the end of 2023 along with $1.7 billion in commercial real estate loans on its books, loans the bank said were becoming increasingly distressed amid the higher-rate climate.[6] 

Also according to the FDIC, Republic First’s total equity was $96 million at the end of 2023, but that’s excluding the $262 million in unrealized losses reflected by its bond portfolio.[7] 

To many learned observers, the demise of Republic First is much more than an incidental bank collapse. They see it – in the context of a broadly weakened regional banking sector – as another sign that substantial risk remains pervasive in the financial system. 

One of those observers is Joseph Lynyak, an attorney at Dorsey & Whitney, who specializes in bank receiverships and failures. 

“This bank failure indicates that additional failures will occur and will range between smaller community banks and larger banks,” Lynyak said in a recent interview with Fox Business.[8] 

Citing the persistent pressures exerted by a symbiosis of higher rates and struggling commercial real estate loans, Lynyak added, “The cause is twofold: higher-cost deposits exceeding the yield on low-yield treasury securities and similar investments held by banks, and the deteriorating commercial real estate market and commercial real estate loans.”[9] 

New York Community Bancorp Saved by $1 Billion Private Investment 

To be sure, Republic First isn’t the first distressed bank to make headlines in 2024. You may recall that New York Community Bancorp (NYCB) was staring down the barrel of collapse earlier in the year on the heels of its $252 million loss suffered in the fourth quarter of 2023.[10]  

It shouldn’t come as any surprise that the two-headed dragon of higher interest rates and struggling commercial real estate loans was at the root of NYCB’s troubles. 

NYCB was spared outright failure when a consortium of investors led by former Treasury Secretary Steve Mnuchin stepped in to save the bank with a $1 billion infusion of capital.[11] But that didn’t change the catalysts of its underlying troubles. And with the collapse of Republic First, consumers and investors are reminded that the uncertainty plaguing the regional banking system currently is not at an end. 

“The FDIC has indicated that banks have potentially significant unrealized losses in their investment portfolios,” Lynyak said, “and many banks will ultimately need additional capital to address these unrecognized losses.”[12] 

Just how many that is remains to be seen. Will it be zero? Five? Ten? 

Or could it be hundreds? 

Sound crazy? Maybe. But there are credible analysts who potentially see as many as several hundred fewer banks in our near-term future due either to actual collapse or consolidation based on the persistent stresses rippling through the financial sector.  

Let’s talk about that next. 

Risk Management Expert: Large Number of At-Risk Banks Means Regulators Must “Walk a Tightrope” 

As the collapse of Republic First Bancorp and the near collapse of New York Community Bancorp make all too clear, the troubles that have beset the banking industry remain relevant…as do the risks they pose to financial institutions. 

In fact, according to recent analysis by Klaros Group, a consulting firm that specializes in regulatory issues and risk management, there are close to 300 U.S. banks that have significant levels of exposure to both commercial real estate and substantial unrealized losses stemming from the sharp rise in interest rates over the past two years.[13] 

According to a report by CNBC on the research, Klaros refuses to name the at-risk banks out of deference to concerns that doing so might trigger runs by depositors.[14] 

Brian Graham, co-founder at Klaros, says he’s aware that regulators are discreetly – but firmly – demanding that the banks of concern make improvements in capital levels and staffing. 

As Graham puts it: 

“If there were just 10 banks that were in trouble, they would have all been taken down and dealt with. When you’ve got hundreds of banks facing these challenges, the regulators have to walk a bit of a tightrope.”[15] 

To say the least. In fact, one wonders just how concerned regulators really are, presently, given how vague and potentially understated Federal Reserve Chair Jay Powell was in March testimony before the Senate Banking Committee. 

Fed Chair Powell: At-Risk Banks Is a Problem “We’ll Be Working on for Years” 

“This is a problem we’ll be working on for years more, I’m sure,” Powell said. “There will be bank failures.”[16] 

Scott Rechler seems convinced of it. Rechler is the CEO of RXR, a multidimensional commercial real estate company based in New York City. In Rechler’s gloomy assessment: 

“I think there’s going to be…500 or more fewer banks in the U.S. over the next two years. I’m not saying they’re all going to fail, but they’re going to be forced into consolidation if they don’t fail.”[17] 

Rechler suggests the threat to the system posed by distressed regional banks that have so much exposure to applicable risks is, to some degree, flying under the radar of regulators…despite the obviously well-documented downfall of regional banks over the past year.   

“I think when you hear the Treasury or the regulators talk about, ‘Well, with real estate, this isn’t a systemic issue,’ I think they’re really focused on the large systemically important, too-big-to-fail banks,” Rechler said. “But when you look at the regional banks around the country, they have a significant allocation of their loans to commercial real estate.”[18] 

In fact, Goldman Sachs estimates that roughly 80% of all the loans made to commercial real estate firms have been made by smaller, regional banks.[19] 

Whether attributable to distressed commercial real estate loans, underwater bond and debt portfolios stemming from higher interest rates, or some combination of the two, it seems clear that uncertainty continues to plague the financial sector…which, in turn, can serve to exacerbate the broader uncertainty besetting the economy. 

By consequence, investors likely have significant exposure, as well, to that uncertainty. 

Savvy investors and savers might look for ways to mitigate its possible impacts. Those who do may conclude that assets reputed to be stores of value – assets such as precious metals – are helpful to that end. Some even could decide to acquire their gold and silver through a tax-advantaged gold IRA in an effort to further leverage the potential benefits of ownership. 

Ultimately, everyone…from individual retirement savers, to asset managers, to even the largest central banks…must decide how best to navigate uncertainty’s cold, murky waters. For some individuals, the answer may be to avail themselves of gold and silver. For others, it could be something else altogether.  

But the larger point is this: The fragility characterizing both the banking system, specifically, and the economy, more generally, appears as though it will remain with us for the foreseeable future. And if that happens, those who truly believe themselves to be among the most prudent investors will have little choice but to, at the very least, monitor its evolution very carefully. 

 

 

[1] Michelle Makori and Anna Golubova, Kitco.com, “No bank is safe, implosion coming: ‘Every single bank is insolvent’ — Lynette Zang” (April 8, 2024, accessed 5/2/24). 
[2] Dylan Sloan and Will Daniel, Yahoo Finance, “Fed yanks an emergency funding crutch that got too popular at the worst possible time for small banks” (March 14, 2024, accessed 5/2/24). 
[3] Jeff Cox, CNBC.com, “Wall Street pushes out rate-cut expectations, sees risk they don’t start until March 2025” (April 17, 2024, accessed 5/2/24). 
[4] Hugh Son, CNBC.com, “Banks are in limbo without a crucial lifeline. Here’s where cracks may appear next” (March 19, 2024, accessed 5/2/24). 
[5] Gina Heeb, Lauren Thomas and Justin Baer, Wall Street Journal, “Regulators Seize Troubled Philadelphia Bank, Republic First” (April 26, 2024, accessed 5/2/24). 
[6] Heeb, Thomas and Baer, “Regulators Seize Troubled Philadelphia Bank”; Sonya Swink, Bisnow.com, “Republic First Bank Seized With $1.7B Of CRE Loans On Its Books” (April 29, 2024, accessed 5/2/24). 
[7] Gunjan Banerji, Wall Street Journal, “Taxes, Tariffs and Debt: Investors Start to Fear the Presidential Election” (April 29, 2024, accessed 5/2/24).                      
[8] Breck Dumas, Fox Business, “Republic First seizure signals more bank failures to come, expert warns” (April 30, 2024, accessed 5/2/24). 
[9] Ibid. 
[10] Elisabeth Buchwald, CNN.com, “Customers are pulling their cash from NYCB, but it’s no bank run” (March 7, 2024, accessed 5/2/24). 
[11] Colin Laidley, Investopedia, “NYCB Secures $1 Billion Investment, Led by Former Treasury Secretary Mnuchin” (March 6, 2024, accessed 5/2/24). 
[12] Dumas, “Republic First seizure signals more bank failures to come.” 
[13] Son, “Banks are in limbo without a crucial lifeline.” 
[14] Ibid. 
[15] Ibid. 
[16] Tobias Burns, The Hill, “Powell: ‘There will be bank failures’ caused by commercial real estate losses” (March 7, 2024, accessed 5/2/24). 
[17] Will Daniel, Yahoo Finance, “Top real estate CEO warns ‘500 or more’ banks will either fail or be consolidated over the next two years” (March 5, 2024, accessed 5/2/24). 
[18] Ibid. 
[19] Elisabeth Buchwald” Cnn.com, “Here’s why regional banks have so much commercial real estate exposure” (February 29, 2024, accessed 5/2/24). 
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