First, the worry was about liquidity. Does a bank have enough cash on hand to weather a wave of withdrawal requests? Second came the issue of solvency. Does the accounting value of assets exceed that of liabilities? The third, equally crucial question for besieged banks is whether there will even be a profitable business after a rescue.
Emergency liquidity is expensive. This is a problem for First Republic, a US bank whose total assets stood at more than $200bn at the end of 2022. Amid panicked deposit flight, it has required heavy government support.
Between March 10-15, First Republic borrowed as much as $109bn from the Federal Reserve at an annualised cost of 4.75 per cent. The $10bn in funds lent from the Federal Home Loan Bank cost more than 5 per cent. Rating agency S&P has stated in a downgrade note that the bank’s asset book, largely of long-dated mortgages, was yielding just 3.5 per cent annually in its 2022 fourth quarter.