First Republic bank and a thought on riskMay 1, 2023
Let me start by saying I really liked First Republic bank. The level of customer service, built entirely on a foundation of great people, went far beyond any other bank. From friendly staff at desks, to fresh cookies, to a valet at the Palm Beach office that returned my car with a cold bottle of water in the center console, First Republic customer service was on par with a Four Seasons Resort (or the polar opposite of Spirit Airlines).
That level of customer service meant I, and I expect most of the bank’s customers, were willing to tolerate a practically zero return on money kept in the bank. When interest rates were low that really didn’t matter. Now a lot is being written about the ease of transferring money to higher yield accounts and how the ability to click and move money hurt First Republic when interest rates rose, but I don’t believe that was the core issue.
As great as First Republic was as a bank, as a lender they were painfully conservative. Getting a mortgage from First Republic meant a large down payment and relatively modest loan amount. I felt this myself when I moved to Miami. They were friendly, but they were essentially lending to people who didn’t need loans.
Being conservative is what got them in trouble, not deposit flight.
The folks that took loans from First Republic were in a strong position and that meant low fixed rates were prevalent. The spread between what the bank received from loans and what they paid in interest was healthy, but that put them in a corner when rates went up. By being conservative the bank had no options when the market changed. It was the hole in their balance sheet created when their low-rate portfolio was repriced to the higher rate market that started the flight. Their customers didn’t leave for higher rates, they left because they feared for the future of the bank.
But how does this tie to technology investments?
Being too conservative can put you at a disadvantage. How many large retailers viewed the Web with disdain in the early days only to open a clear path for Amazon to dominate? That tentative approach to the Web turned out to be a very bad idea.
We still see organizations claiming to be “conservative” as a reason for ignoring productivity gains in favor of “hard” benefits when building a business case. That won’t work when your competitors gain economies in productivity that leave you trying to catch up.
A downturn is a great opportunity to reset and streamline. A cautious approach to technology investments is good, but a conservative approach can be deadly.
Manage risk, don’t avoid it.