2023-05-02 20:38:01
On Monday, First Republic Bank became the third US bank seized by regulators in the past two months after Silicon Valley Bank and Signature Bank. With the sale to JPMorgan Chase of the majority of the assets of the entity with headquarters in California, and the guarantee by the entity of the deposits, the second largest bankruptcy of an American bank since the Washington Mutual en 2008.
They collectively breathed a sigh of relief. He banking systemthe president assured Joe Biden“es solid and it is safe”. “This part of the crisis is over”, he also sentenced Jamie Dimon, CEO of JPMorgan. But Dimon himself spoke only of a “part”, he recognized that there may be falls of other small institutions. And the questionsthe nerves, the fears and the threat of mistrust, however, remain.
Why the First Republic collapsed
The entity established in San Francisco in 1985, although far from the giants of the sector, had grown to become one of the largest in the US, with 229,000 million in assets. She was known for having a majority of high net worth clients and for their wealth management services.
As in the case of Silicon Valley Bank, it had done numerous investments in assets such as mortgages and public debt when the interest rates were low and suffered the negative impact when the Federal Reserve started his aggressive policy of increases to try to contain inflationny those assets lost value. Also as SVB and Signature, the risk management associated with that turn of the central bank was nefarious.
In March, as these two entities went bankrupt after Deposit leaks due to a panic fueled by social networks, and as part of an extraordinary push by the public and private sectors to try to stem the bleeding, the First Republic received a $30 billion injection from other large entities. The mattress did not solve the problems, and with the lingering fears due to the instability of the system and the bank’s ability to meet its obligations, the depositories de First Republic they withdrew more than 100,000 million dollars in six weeks after the fall of SVB.
Its value sank 97% on the stock market. And the government intervened, opening a process to search for a buyer that was resolved at dawn on Monday with the announcement of the sale to JPMorgan Chase.
Contained or current risk?
Some economists and observers believe that there will be no contagion and what are they content the problems of First Republic, and SVB and Signature for the particularities and the idiosyncrasy of the entities. Among them is William Chittenden, professor of finance and economics at Texas State University, who recalled in ‘The Washington Post’ that the three worked very concentrated on a niche of clients (mainly from the technology sector), had a high percentages of deposits over $250,000 (the ceiling up to which deposits are currently covered by the Federal Deposit Insurance Corporation, FDIC, although it has been exceeded in this crisis) and had invested in assets with long-term maturitiesthose most affected by the shift in the Fed rate policy (which this Wednesday is expected to approve another rise). In the three areas, according to the expert, they were “eextremes and they managed the risks very badly.”
Others, however, believe that the wound has not stopped bleeding. Robert Jockett, a Cornell professor of law specializing in finance, has spoken “not from the end of the March banking crisis, but of a continuation of the beginning”. The deposit runaways, although lowered compared to March, continue to affect regional entities. Those banks are resorting more to emergency loans public. And the balance sheets do not fully reflect realitybecause if the entities had to sell part of their assets today, those accounts would reflect losses that are not currently accounted for.
In addition, the purchase of First Republic by JPMorgan Chase, which was already the largest bank in the US, feeds the alert before the unstoppable growth of the banking colossi. the senator Elizabeth Warrenin a statement on Monday, denounced that the bankruptcy “shows how deregulation has made the ‘too big to fail’ problem even worse.
Regulation
The bankruptcy and acquisition of First Republic has taken place after on Friday the Federal Reserve make a report public after making a collapse autopsy of the other two entities. In addition to pointing out the mistakes of these banks, and the new reality in which new technologies have allowed both the spread of panic and the flight of deposits to accelerate, the central bank carried out a MEA culpa about his own failures and spoke of “weaknesses in regulation and supervision what to deal with.”
The Fed, for example, acknowledges that it “did not appreciate the seriousness of the critical deficiencies” in SVB and therefore kept it “well valued even as conditions deteriorated and significant risks to its stability and soundness emerged.”
At the center of the storm are the regulatory changes that the Congress in 2018 and the Fed in 2019 they made relaxing controls on banking that had been imposed with the Ley Dodd-Frank after the great crisis of 2008 and 2009.
Now the Fed is considering reassess the rules for regional and midsize banks that have at least 100,000 million in assets, to impose more demanding stress tests and liquidity requirements. Furthermore, she has promised study how it protects against the risks of rate increases of interest. Also recommends new limits on executive compensation.
Related news
Monday also the FDIC submitted a report in which it changes, with three options; maintain the current limit of $250,000 in insured deposits, move to cover all regardless of the amount or set different limits depending on different types of personal or business accounts. He showed a preference for this third way, although he did not give specific details or adopt a decision, since this must be approved by the Congress.
Many see it imperative that the Chambers act to intensify regulations but the legislative initiatives startups after March bankruptcies so far they have not produced any fruit.
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