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Why First Republic may not be the end of the crisis

After a six-week spiral, First Republic bank finally collapsed in the wee hours of Monday morning.

Federal regulators seized the bank and immediately sold most of its assets to JPMorgan Chase, making fast work of what is now the second-largest bank failure in US history after Washington Mutual in 2008 (which was then acquired by — you guessed it — JPMorgan Chase).

For those keeping track at home: That’s three US bank failures in less than two months.

What’s going on?

A quick refresher on how we got here:

  • The Fed began raising interest rates over a year ago, using its bluntest tool to combat inflation.
  • Rising rates eroded the value of bonds that made up a big chunk of the banks’ investment portfolio.
  • That left them vulnerable to a liquidity problem if customers started drawing down their accounts.
  • The three banks — Silicon Valley Bank, Signature, and First Republic — all had particularly jittery customers with high levels of uninsured funds (read: balances above the $250,000 limit set by the Federal Deposit Insurance Corporation).
  • Banks don’t keep all their customers’ money in cash, so when everyone demands their funds at the same time, it’s bad news.
  • In early March, SVB depositors, sensing trouble at the lender, yanked their money at once, forcing SVB to sell bonds at a loss to pay out its customers.
  • When it couldn’t keep up, regulators swooped in to clean up the mess.
  • Signature and First Republic suffered from their similarities to SVB, catering to high-end coastal clientele in areas such as tech and private equity.

The markets seemed, if not pleased, at least not totally freaked out by the First Republic resolution. Stocks ended the day down, but only slightly. The First Republic news was just one of many closely watched events that will weigh on investors this week. (Get excited: we’ve got JOLTS, the Fed policy meeting and the April jobs report to look forward to.)

Everyone on Wall Street appears to be drinking from the same punch bowl as Jamie Dimon, who framed the sale as a bookend to the crisis.

“No crystal ball is perfect, but yes, I think the banking system is very stable,” Dimon said on an investor call Monday. “This part of the crisis is over.”

Not everyone shares that optimism, of course.

I spoke to Robert Hockett, a law professor and expert on public finance at Cornell University, for the decidedly less sunny take:

“Contrary to cheery Wall Street and Washington predictions made over the weekend, this is not the end of the March banking crisis — it is still the beginning,” Hockett said.

To his mind, the sale just makes JPMorgan, already the nation’s largest bank, even bigger, and the power of the biggest Wall Street banks more concentrated. The effect of that is the hollowing out of the regional banking industry.

Hockett and others argue that it’s time to scrap, or at least lift, the $250,000 limit on deposit insurance, and thereby stop the panic that causes depositors to flee.

That idea got an extra boost on Monday, when the FDIC itself released a report advocating for an increase in the deposit insurance limit for business payment accounts. Lawmakers in DC have reportedly been in talks to, at least temporarily, expand the upper limit of the FDIC cap.


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