US Bank Crumbles: Can Bitcoin Fix This?

Shares of First Republic Bank (FRC.N) fell over 20% after reporting a deposit decline of more than $100 billion in Q1. Will legacy banks continue to downplay cryptocurrency, or diversify?

Depositors pulled over $100 billion from First Republic Bank in the first few months of the year. The deposit outflows started last month after two regional lenders collapsed, leading customers to move their money to larger institutions. The news follows a Q1 rocked by the largest banking crisis since 2008.

“With the closure of several banks in March, we experienced unprecedented deposit outflows,” First Republic’s chief financial officer, Neal Holland, said in a statement. “We are working to restructure our balance sheet and reduce our expenses and short-term borrowings,” he added.

As the bank grapples with liquidity problems, some observers may wonder whether it has gone far enough to diversify its offerings. These have been somewhat limited. For example, First Republic Bank has not established a crypto trading platform of its own, instead directing customers to third-party brokerages. Here, it stands in contrast to banks and platforms such as SoFi, Neobank N26, Juno, Robinhood, and others with more diversified offerings.

New Directions for First Republic Bank

The San Francisco-based bank is considering restructuring its balance sheet to offset the drop in deposits. First Republic plans to slash its expenses by cutting executive compensation, office space, and laying off 20-25% of employees. 

Additionally, the bank aims to increase its insured deposits and lower borrowings from the Federal Reserve Bank. First Republic has said it is pursuing strategic options to strengthen the bank, but few details are available. On Monday, the lender held a post-earnings conference call that ended without executives taking questions from analysts. 

Despite receiving $30 billion in combined deposits from US banking giants, the bank’s deposits fell to $104.47 billion in Q1 from $176.43 billion in Q4. The bank’s loan book and investment portfolio also became less valuable as interest rates rose. Moody’s downgraded First Republic’s rating by three notches on Monday.

Bob Elliott, the Co-Founder and CEO of Unlimited, told CNBC’s “Closing Bell: Overtime” that the bank was a “zombie bank”:

“At this point, FRC is a zombie bank with deposits down almost $100 billion from the private sector. By and large, its balance sheet is being supported by the Fed programs that it’s borrowing from.”

Can Bitcoin Fix Banking Woes?

Unlike the market trauma of last year, Bitcoin has performed incredibly well in 2023. So far, the cryptocurrency has been the best-performing asset of the year.

Yet with all the success of this asset class, traditional institutions are standoffish about crypto. It is still rare for established banks to offer crypto trading platforms or have extensive crypto assets on their balance sheets.

Regulators are partly to blame. The Bank of International Settlements restricts central banks to only holding 2% of their reserves in cryptocurrency. The European Union will likely limit its banks’ exposure to cryptocurrencies soon.

This puts traditional retail banks at a disadvantage. Compounding their woes, legacy banking institutions also face so-called “challenger banks,” smaller and newer institutions that leverage better fintech to offer a wider array of services. Often these banks offer services via an app and website. Despite economic challenges, the market continues to attract new players. 

According to Finbold data from October 2022, there are now 291 challenger banks worldwide, with 43 new digital banks added in the past year – a growth of 17.33%. Many of these banks offer more seamless interaction with crypto, DeFi, and other fintech, with many offering a trading function.