First Republic Bank’s falling share price has Muni bondholders concerned about the bank’s large stash of state and local debt.
The bank was downgraded to “junk” by S&P Global Ratings on Wednesday and was the worst performer in the S&P 500 according to FactSet. The stock is down 74.99% month-to-date.
First Republic was hit after the collapse of Silicon Valley Bank on Friday and Signature Bank on Sunday. Cryptobank Silvergate Capital also said earlier this month that it was closing.
First Republic said Sunday it had bolstered its finances with funds from the Federal Reserve and JPMorgan Chase & Co. Bank executives said in a statement that day that First Republic’s “capital and liquidity positions are very strong.”
The San Francisco-based First Republic, which is the 14th largest bank by assets according to the Federal Reserve, had $19.4 billion in municipal bonds on its books as of Dec. 31, according to its most recent filing. In contrast, Cincinnati-based US Bancorp, the fifth largest bank, has just over $10 billion.
So far this week, Muni debt has received a boost as investors have fled to ultra-safety assets. If First Republic sells its munis, a larger-than-usual amount of debt could be thrown onto the $4 trillion market, dragging prices down.
But historically, when banks have unloaded Munis under pressure, they have generally been able to do so in an orderly manner, said Daniel Solender, partner and director at investment firm Lord Abbett.
Should First Republic have to sell, Mr. Solender said, “it doesn’t appear as if it would be necessary to expedite the sale.”
According to the Federal Reserve, about $580 billion in outstanding municipal debt is held by banks. Regional banks own nearly $140 billion, according to Barclays PLC. Demand is chronically outstripping supply in the ammunition market, one reason it’s generally calm in the face of turmoil – barring a really big sell-off.
“Silvergate has sold $4 billion,” said Mikhail Foux, head of community strategy at Barclays. “I don’t think anyone noticed and no one even knew.”