When branches First Republic Bank, the latest regional lender set to face a rise in US interest rates, opened on May 1, as branches of JPMorgan Chase did so. banking giant snapped up In an auction conducted by the Federal Deposit Insurance Corporation, the troubled California-based lender (FDIC), a regulator, over the weekend. JP Morgan will assume all of First Republic’s $100bn-odd deposits; The loss on the residential and commercial loans of the bank will be shared with the bank FDIC,
weakened after the fall of the First Republic Silicon Valley Bank ,svb) in March. A lot of depositors at both banks were not covered by federal deposit insurance, which takes flight. And many fled: First Republic’s deposit base collapsed in the first quarter of the year, from $176bn at the end of 2022 to $104bn at the end of March. The bank turned to costly short-term borrowing, some of it from the Federal Reserve’s emergency facilities. plug the gap, The value of loans it had taken has declined when interest rates have come down, raising concerns about its solvency.
In essence, First Republic faced a more extreme version of a problem facing other lenders. Rapidly rising interest rates have hit US banks on both sides of the balance sheet. Their assets, in the form of loans and bonds, are of little value due to high interest rates. Their liabilities, in the form of deposits, are increasingly uncompetitive with highly liquid and safe US money-market funds, which offer yields of around 5%.
The deal provides two points of reassurance for the rest of the US banking system. The first is that the acquisition is not a bolt from the blue. First Republic’s share price plummeted 89% between March 8 and 20, with the decline followed by a period of intense panic. svb, Since then its name has topped the list of lenders about which investors are concerned. When its share price began falling again after releasing a disappointing set of quarterly earnings on April 24, shares of other US banks were unaffected, raising hopes that its woes would not be contagious.
The second point of assurance is that the sale has been arranged. It suggests that the big banks still see opportunities to acquire the assets of their struggling peers. Acquisitions can also be a step towards a healthier industry. There are approximately 4,700 banks and other savings institutions in the US; Some consolidation won’t go amiss. On this occasion, a rule that banks with more than 10% of deposits nationwide cannot buy other lenders was waived to make the deal, as it would have disallowed JPMorgan from making the purchase.
But such reassurance applies to the banking industry as a whole – not just firms with similar positions. The first attempt to stabilize First Republic occurred in March when several large banks, including JP Morgan, announced they would deposit $30bn with the institution. Obviously, the confidence vote was insufficient to reassure investors and depositors. Despite their resilience in the final week of April, US regional-bank shares are down 30% from two months ago, and haven’t recovered at all since. svbThe fall of Attractive yields on short-term government bonds held by money-market funds will continue to be a source of pressure.
Meanwhile, the FDIC Its deposit-insurance fund is estimated to have cost about $13bn in facilitating the deal, to add to the $20bn it lost after the collapse. svb and $2.5bn when Signature Bank collapsed. Together, the losses account for more than a quarter of the $128bn deposit fund held at the end of 2022. As the fund runs down, banks may be forced to refill it.
The question now is how other mid-sized banks respond to the pressure of rising rates, and what will be the extent of the economic damage. PacWest Bancorp, another regional lender whose share price has plunged, recently announced it was exploring asset sales in response to deposit outflows. Tan Kai Xian of Gavecal, a research firm, notes that more asset sales by smaller banks means fewer new loans, and more conservative lending standards: “This self-reinforcing cycle is unlikely to be broken quickly.” America’s banking turmoil isn’t over yet.
