What happened

Shares of First Republic Bank (FRCB) have slumped by as much as 67% this week, according to data from S&P Global Market Intelligence. The California-based regional bank is trying to shore up its liquidity by taking out loans from the Federal Reserve and larger banks such as JPMorgan Chase after the collapse of Silicon Valley Bank triggered depositors to withdraw their funds.

As of 9:47 a.m. ET on Friday, shares of First Republic Bank are down 66.8% this week and almost 80% year to date.

So what

After the collapse of Silicon Valley Bank, investors have become rightfully skittish about First Republic Bank's prospects, as the regional bank has some of the same characteristics that brought down the tech-focused bank last week.

There are two main problems that are leading both customers and investors to become fearful. First Republic has a large number of uninsured deposits (68% of its total deposits, according to S&P Global) that are not formally backed by the U.S. government and the FDIC. This situation has led many of these uninsured depositors to ask for withdrawals.

But with interest rate increases lowering the value of fixed-income securities such as Treasury bonds and mortgage-backed securities that First Republic bought with deposits it received over the last five years, it is unlikely that the bank would be able to fully pay back depositors if forced to liquidate its entire loan book today.

In response to this glaring issue, First Republic has scrambled to shore up liquidity to assuage customer fears and fulfill all its withdrawal requests. On March 12, management put out a press release stating that it had made a deal for additional borrowing capacity with the Federal Reserve and JPMorgan Chase, putting its current unused (keyword: unused) liquidity to fund operations at $70 billion.

With total deposits of $176.4 billion at the end of 2022, this should give First Republic a lot of wiggle room to pay back depositors in full.

On top of this, on March 16, First Republic put out a press release announcing a $30 billion deposit inflow from a large group of big banks, including JPMorgan Chase, Bank of America, Citi Group, and others. This move will not only give First Republic more wiggle room to fulfill withdrawal requests, but it should also help calm the nerves of its uninsured depositor base, potentially stopping a run on the bank.

Now what

While management has taken drastic action to keep its company operational, investors have aggressively started to flee First Republic, with shares getting more than a 50% haircut in just a few short trading days. If the price drop from this week holds up, the stock will have wiped away all of its gains since the bank went public back in 2010.

This is the reality of investing in bank stocks. Operations look sound until they don't, something that is very difficult to forecast as an individual investor. Unless you're comfortable taking these risks, it's probably best to avoid banking and financial stocks for your portfolio.