Yahoo Finance Live anchors Julie Hyman and Jared Blikre break down the plunge in stock for First Republic Bank.
Video Transcript
JULIE HYMAN: We're a few moments from the opening bell here. And, as we mentioned, we just got some headlines on First Republic Bank. We're going to get to Credit Suisse in just a second. Just wanted to reiterate those First Republic Bank headlines, which is that it was cut to junk by S&P on the risk of outflows.
Now, we've already seen a lot of money come out of the stock, right? And it's going down once again this morning, down by 25%. S&P saying "We expect increased wholesale borrowings to further weigh on its net interest margin at First Republic. We believe that First Republic's deposit base is more concentrated than most large US regional banks, which presents heightened funding risks in the current environment." That is effectively what happened at SVB. All of its depositors were from one industry.
And so this is a risk that S&P is highlighting here at First Republic, too, Jared. And so you probably know a little bit more about this than I do. When a company is cut to junk, what happens, then, to how the bonds are priced, to the people who already hold the debt at the company?
JARED BLIKRE: Great question because we haven't talked-- we haven't really talked about the ratings agencies in, what, 15 years? Well, it's been sooner than that. But you get the idea, because we haven't had to. And now we're facing a banking crisis.
Ratings agencies at the forefront, they are supposed to be the gatekeepers. They're judging the credit quality of certain issuers. Issuers are companies like these banks or it could be The Gap, for instance.
And when they issue these bonds and Moody's will reduce the credit rating on it, guess what? The interest rate on those bonds that investors require jumps up. Meanwhile, the price of the bond goes down. So those two are inversely related. So as bond prices crash, the interest rate goes up.
And then separately we have credit default swaps, which are bets on that debt defaulting. And so on Credit Suisse, for instance-- now I'm switching gears, but we're going to the Credit Suisse. That has blown out almost to about 1,000 basis points or 10 percentage points. When we get to those levels, those are the levels at which banks historically have failed. So we're not talking about FRC failing here right now.
But another definition I'd like to get to are wholesale deposits. Why is it looking for wholesale deposits? Because as a bank, it has been losing deposits. And it has to find other deposits to match its liabilities and its assets elsewhere.
So it is going into the wholesale market looking for those. I've also read that FRC uniquely positioned to not take advantage, not be able to take advantage of the Fed's credit facility that it just opened up because it doesn't have the kind of collateral that the Fed is looking for. So facing some unique challenges on its own there. And in the space that we've been talking about, I've watched, what, over the last five minutes, went from down 15% to down 25%, down 28%.
JULIE HYMAN: Yeah, I mean, and so that's what's been going on there. Just to take a pause and concentrate on First Republic and some of the other banks that we're watching here for a moment because basically what S&P here is doing is confirming what the market chatter has been or reinforcing or highlighting what the market chatter has been, that there is these concerns that there is going to be perhaps runs on other banks like a First Republic, for example. And when you talk about the rating and the effect that this has with the rates going higher-- in other words, if I as an investor am going to buy debt that is now being deemed junk or the riskiest type of debt, I want to get paid for the risk I'm taking. So that, hence the interest rate on that type of credit or type of corporate bond.
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March 15, 2023 at 08:43PM
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First Republic Bank cut to Junk by S&P, stock plummets - Yahoo Finance
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