Economic Insider

First Republic Bank Failure: Is US Banking on the Edge?

JPMorgan Chase acquired most of the assets of First Republic Bank, which the federal government took over after it became the second-largest bank failure in US history. The collapse follows that of Silicon Valley Bank and Signature Bank earlier this year.

These banks suffered from many depositors leaving for larger institutions over concerns about their ability to cover potential losses from rising interest rates. This could be a sign of a slow unfolding banking crisis, and there is a possibility that more banks could shut down.

The failures of Silicon Valley Bank, Signature Bank, and First Republic Bank will significantly impact the financial services industry, which is a crucial part of the $26.5 trillion US economy.

Critical Weeks Ahead

This week is important for Wall Street, with upcoming decisions on interest rates, Apple’s earnings report, and a jobs report expected to show a slowdown in hiring. Despite this, stocks rose slightly on Monday morning, suggesting that the banking crisis that started in March may be subsiding.

Traders predict that the Federal Reserve will increase interest rates by a quarter percentage point at this week’s meeting following the First Republic Bank failure resolution. However, the former director of the National Economic Council, Cohn, warns that the broader impact of the Fed’s rate-hiking cycle will continue to be felt.

This will mark the fastest tightening cycle since the early 1980s, potentially leading to unintended consequences on banks, balance sheets, and the commercial real estate market.

Cohn monitors consumer spending, which makes up 68% of economic activity, as tighter credit conditions could weigh on spending due to elevated inflation and interest rates. Many experts predict that stricter credit conditions are on the horizon, which could harm spending.

What Exactly Happened to First Republic Bank?

First Republic Bank has been in a precarious financial position for several months, relying on two significant bailouts to keep it afloat. Despite hopes of a stock rally, the bank’s total deposits fell 41% to $104.5 billion in the first quarter, far below the projected $136.7 billion. 

The shutdown led to a sharp decline in stock prices, which closed at $3.51 on Friday, down approximately 97% for the year.

Are More Banks in Danger?

The question on everyone’s mind is whether the failure of First Republic Bank indicates a broader systemic risk. While it is unlikely that there will be another banking crisis on the scale of 2008, there is a real possibility of further failures among mid-sized banks with similar vulnerabilities.

Goldstein believes that more banks are exposed to this fragility and that more failures could occur. Although things have been stable for a while, there is still a risk of a full-blown systemic event. Regulators have acted to prevent First Republic’s failure from causing runs on other banks, and its business was relatively self-contained. 

However, many other mid-sized banks have suffered significant unrealized losses due to the Fed’s interest rate hikes, which could threaten their solvency. These financial issues could lead to solvency-threatening runs at other banks if the public recognizes these losses.

Pressuring the Federal Government 

The banking system is still under stress, which will likely force the government to maintain its current monetary policy despite high inflation. The slow growth of gross domestic product in the first quarter, which was lower than expected, suggests that a slowdown or recession is on the horizon.

Markets expect the Fed to cut interest rates by at least half a percentage point before the end of the year to combat a possible contraction. Policymakers will be paying attention to wage numbers and their impact on inflation, so a soft payrolls report with lower wages could be seen as positive by a market looking for a less aggressive Fed.

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