What The Failure of First Republic Bank Says About Bitcoin

First Republic Bank has failed. Its shares stopped trading before US markets opened on Monday after regulators seized the firm. It’s the second biggest regional bank failure in US history, and here’s what it says about bitcoin. 

What happened to First Republic Bank?

First Republic started doing business in the mid-1980s, giving cheap loans to wealthy customers. It was a good business model while it lasted – but it broke down recently while the US Federal Reserve (Fed) aggressively hiked interest rates to try and tame inflation. According to Reuters, JPMorgan Chase (America’s biggest bank) will now buy most of First Republic’s assets.

Banks make money by lending out customer deposits to earn interest. And when interest rates go up, they can earn more interest. But like most US banks, First Republic bought US Treasury bonds to earn some of that yield. In other words, the bank lent customer money to the government in exchange for interest payments. Since rising interest rates cause bond prices to drop, the end result was a big “unrealized” loss on First Republic’s balance sheet. And to add fuel to the fire, the bank also held over half its loans in illiquid (tough to sell) residential mortgages.

Another US bank collapses this year.

It was a similar saga with two other banks that collapsed in March: Signature Bank and Silicon Valley Bank (SVB). Their unrealized losses were manageable at first, so long as they didn’t have to realize them by selling their bonds. But when customers got wind of the bank’s solvency issues, they wanted their money back, pronto. So you had a classic bank run: everyone tried to pull their cash out, but the bank never had enough cash to give.

First Republic now joins Signature and SVB in the Federal Depositors Insurance Corporation’s (FDIC) failed bank list of 2023. The FDIC insures customer deposits of up to $250,000, which would usually cover most people. But First Republic’s wealthy clients weren’t most people. After seeing SVB tap out in March, they withdrew more than $100 billion of deposits, fearing the worst. That went on until there was no more money left to withdraw.

So what does the collapse of First Republic Bank have to do with bitcoin?

This year’s bank runs showcase one of bitcoin’s biggest selling points: it has no counterparty risk. When you put money in a bank, you’re trusting a company to look after it. That company can be regulated and insured until the cows come home, but that won’t stop a bank run. When you give your money to a bank, it lends it out, so it might not always be there when you need it most. It’s happened before, and unfortunately, it will happen again. 

And then there’s bitcoin. It’s volatile, for sure. But at least you can store it in a wallet that only you can access. So far this year, bitcoin has proven to be a sound hedge against bank failures. Satoshi Nakamoto probably saw this coming, after writing the bitcoin white paper during the last banking crisis in 2008. 

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Key Points

• First Republic Bank’s collapse is the second biggest regional bank failure in US history. JP Morgan is going to buy First Republic.
• The bank is now the third this year to make the FDIC’s failed bank list, after a series of bank runs took them down. 
• So far this year, bitcoin has proven to be a hedge against bank failures.