FAU Expert: Almost 300 Banks Are at Higher Risk of Failure
Warning signs of Republic First Bank’s failure were evident for a while, and now more banks across the country are exhibiting similar signs of a risk of failure, according to a finance expert at Florida Atlantic University.
Warning signs of Republic First Bank’s failure were evident for a while, and now more banks across the country are exhibiting similar signs of a risk of failure, according to a finance expert at Florida Atlantic University.
The risk factors of Philadelphia-based Republic First Bank’s potential to fail were hiding in plain sight as banks must report the market values of their securities in their quarterly regulatory filings, according to Rebel Cole, Ph.D., Lynn Eminent Scholar Chaired Professor of Finance in FAU’s College of Business. Republic First Bank reported unrealized securities losses in excess of its equity as early as June 2022.
State regulators closed Republic First Bank in April 2024, marking the first bank failure of the year. Fulton Bank entered into an agreement with the FDIC to purchase most of Republic First’s $6 billion in assets and to assume most of its $4 billion in deposit liabilities.
“The same risk factors, unrealized losses on investment securities and heavy reliance upon uninsured deposits, that brought down Silicon Valley Bank also brought down Republic First,” Cole said. “These risk factors triggered concerns of both investors and depositors about the viability of the banks when the banks announced efforts to raise additional capital before actually securing these additional funds.”
Other banks in the country could be at risk of failure as unrealized securities losses reached $478 billion, the most recently available data shows. Already, 40 banks with more than $1 billion in assets reported unrealized security losses greater than 50% of their equity capital. More than 200 smaller banks have done the same.
During 2020, bank deposits grew by more than 20% ($3 trillion) as depositors placed their government-funded pandemic transfer payments into their bank accounts; during 2021, deposits grew by another 15% ($2 trillion). Without profitable lending opportunities during the pandemic, banks put more than $2 trillion into investment securities, an increase of more than 50%. Banks were searching for yield, so they invested in the longest maturities available to them.
Since the end of 2023, the 10-year treasury yield jumped from 3.86% to 4.5% as the Federal Reserve Board has been steadily raising rates to combat inflation. As rates go up, the value of long-maturity securities decreases, inflicting huge losses on many banks.
Considering rising interest rates, upcoming data should show that losses have ballooned to more than $600 billion.
“Those numbers of banks reporting security losses 50% greater than their equity capital will swell because of the rise in interest rates since the end of last year,” Cole said. “We could see additional banks fail and will have to see if this will ultimately lead to another banking crisis.”
-FAU-
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