ALEX BRUMMER The Bell tolls for U.S. banking
Bell tolls for US banking: With every failure and bailout, prospects of maintaining confidence seem increasingly distant, says ALEX BRUMMER
The collapse of First Republic is one of the biggest failures in U.S. banking history and represents a serious blow to confidence not only in U.S. banking, but in financial stability around the world.
The fantasy that the banking crisis was over and resolved by the rescue and divestiture of Silicon Valley Bank, Signature and Credit Suisse has been blown apart.
These banks were the first wave of victims of the rapid end to a period of super easy money following a sharp rise in official interest rates on both sides of the Atlantic.
Easy money led to foolish loans, and higher borrowing costs turned fixed-income positions, held on many balance sheets, into lossmakers that destabilized the entire system.
Threat: The worst of current bank failures is confined to the US and Switzerland, but there are no guarantees that European banks are immune
The current quakes bring back memories of 2007-2008 and the great financial crisis in which regulators fought every weekend to resolve the futures of failing banks before stock markets opened.
The worst of the current failures have been confined to the US and Switzerland, but there are no guarantees that European banks are immune.
First Republic’s saving grace is JP Morgan Chase. The veteran boss of the bank, Jamie Dimon, is good at this. During the financial crisis, he stepped in to save Bear Stearns and took control of Washington Mutual, giving JP Morgan a retail banking operation. Dimon showed his interest in First Republic when he orchestrated a $30bn (£24bn) deposit syndicate in March.
Shares of First Republic have since free-falled and $100bn (£80bn) in deposits have fled. What is frightening about the fate of First Republic, SVB and Credit Suisse is the speed of deposit outflows.
Social media and one-key technology have created the conditions for unprecedented bank runs far faster than anything in economic history.
JP Morgan is effectively taking over all of First Republic’s remaining deposits (approximately £83 billion) and its assets.
If some of these assets turn out to be rotten, the losses will be shared between Dimon’s bank and the US bancassurance and regulator.
Potential losses could be as high as £10bn, but when the books are opened there’s no telling what will creep out.
SVB directly served the financing needs of Silicon Valley entrepreneurs and provided a portion of their wealth.
First Republic met their borrowing needs by providing huge low-rate mortgage loans to wealthy borrowers in San Francisco and Silicon Valley. This made the region one of the most expensive places in America.
When the Federal Reserve began to reduce inflation in 2021, First Republic found itself on a huge pile of loans that had been lent out at low rates while interest rates skyrocketed.
The surprising change in borrowing costs has been far from smooth. In autumn 2022, the Bank of England had to launch a £60 billion stabilization effort to prevent problems in the UK pension system from leading to insolvencies.
There is a fear that similar crises could develop in the financial system outside of traditional banking.
Financial leaders have gone to great lengths to assert that what is happening in First Republic and elsewhere is not a repeat of the great financial crisis.
Maybe. But with every failure and bailout, the prospects of preserving fragile confidence in large parts of the banking system seem increasingly distant.