Fourth Bank Fails in Two Months!
Troubled First Republic Bank (FRB) was taken over by regulators and sold to JP Morgan Chase over the weekend following a chaotic week of losses. First Republic Bank, with $233 billion in assets, became the second largest bank failure in U.S. history behind Washington Mutual in 2008. Three of the four largest bank collapses occurred in the last two months.
Last week, FRB stock lost more than 90% of its value after revealing $102 billion of deposits had left the bank. Government officials from multiple agencies, including the Fed, Treasury, FDIC, and numerous lending institutions, held emergency talks on Friday to structure a deal that didn't involve FDIC receivership.
The agencies struck a deal with JP Morgan Chase over the weekend to assume the remaining $92 billion in deposits, $173 billion in loans, and $30 in securities. The deal includes language for shared losses with the FDIC and $50 billion in FDIC financing for JP Morgan. The FDIC expects to lose $13 billion in the deal. The FDIC stated that all 84 FRB branches would be open Monday under JP Morgan Chase's regular business hours. Customers will have full access to deposits.
How did we get here?
The banking industry has been in turmoil since the March 9th bank run on Silicon Valley Bank (SVB). The following is a summary of events.
March 9- Depositors try to pull $42 billion from SVB in one of the largest bank runs in decades.
March 10- Regulators seize SVB assets and place them in FDIC receivership.
March 11- Wide spread market panics of a systemic collapse.
March 12- Joint statement by FDIC, Fed, and Treasury to cover all deposits.
March 12- Regulators shut down Signature Bank and declare all depositors will be made whole.
March 13- Massive losses for regional banks.
March 16- JP Morgan Chase, BOA, and nine other banks shore up FRB with $30 billion in uninsured deposits to restore market confidence.
March 28- Fed Vice Chair of Supervision Michael Barr testifies before Senate Banking Committee. He states that small and mid-size banks need tighter capital and liquidity requirements and regulations.
April 4- JP Morgan Chase CEO Jamie Dimon writes a letter to shareholders that tighter regulations would not have prevented the bank run at SVB.
April 14- Largest banks reported a revenue surge as deposits flowed from smaller regional banks to the "too big to fail" banks.
April 19- Dozens of regional banks show huge losses and deposit exoduses.
April 24- FRB reports a loss of $102 billion in deposits, excluding the $30 billion infused on March 16.
April 28- Stock down 96% from March 9. The price on March 9 was $106.42. The price on April 28 ended the day at $3.51.
May 1- U.S. regulators seize FRB assets and sell them to JP Morgan.
What does it mean?
The problems in the banking industry are far from over. The Social Science Research Network published a paper showing 186 U.S. banks at risk of collapsing in 2023. First Republic is only the fourth U.S. banking casualty (if you count Silvergate), so this could get ugly fast. The paper found that 10% of all U.S. banks are funded less and have more considerable unrecognized losses than SVB. If that wasn’t scary enough, SVB was only hedged 0.4% against higher interest rates at the end of 2022. It was hedged around 12% at the end of 2021. SVB, Signature, and First Republic should have adequately hedged their risk management strategies.
U.S. banks have at least $7 trillion in uninsured deposits. The FDIC guarantees deposits at a bank for up to $250,000. When depositors fear a bank will not be able to return deposits, they pull their money from the bank, usually called a bank run. (Just for the record, readers of this blog were warned back in October that a bank run was likely.) Investors realized that SVB would only be able to return about 90% of deposits, and they pulled $43 billion in one day through their cell phones.
The market has a significant moral hazard. A moral hazard is financial institutions taking excessive risks because they don't fear consequences. Holding excess cash in a bank above the FDIC limit is a massive risk. The banks and stock market believe the Fed will always bail them out, but that is an untenable and unsustainable model. Each entity should have a sustainable plan other than a bailout plan. The same is true for individuals. The government won't always be there to bail people out, so everyone should hedge their portfolio against downside market risks.
Precious metals can hedge your position. In typical markets, most people put 5-20% of their net worth into precious metals. With everything going on, some people are rethinking that strategy for much higher numbers. The risk is real, and one hiccup could spell disaster. Don't put this off any longer. Please protect yourself. We can help.