Some might not be banks government officials worry in particular about nonbank companies such as asset managers and insurers that are less regulated but still interconnected with the banking system. No doubt other financial firms will experience trouble as interest rates stay high and growth slows. And all three of those failed banks shared clear links: lots of runnable deposits and huge unrealized losses on their books.įinancial regulators are keeping an eye out for other risks that accompany higher borrowing costs, such as the potential for losses on commercial real estate, which has been in a period of sustained uncertainty in the wake of the pandemic as large numbers of workers no longer use office space. It’s very possible, but there are no obvious candidates teetering the way First Republic has been. That’s because it’s sharing some of the losses from First Republic’s portfolio of residential mortgages and commercial loans. Still, the FDIC expects to take a $13 billion loss to its deposit insurance fund, financed by fees from banks. But failing to do so would’ve signaled that the government wouldn’t necessarily stand behind any deposits at failing banks - jeopardizing a convenient ambiguity that has helped stabilize the system, at least for now. Backing those deposits would have been a bad look to the public. This result is especially welcome for the government politically because by the time it failed, a large number of the uninsured deposits at First Republic were simply money that had been poured in by big banks. Selling First Republic sidesteps that problem. In the wake of that move, there’s been some question about whether the government would be willing to do the same thing for other failed banks. They took that step for the two banks because they worried that if they didn’t, uninsured depositors at other banks would also run, sparking needless panic across the system. This was a good outcome for the FDIC, which didn’t want a replay of March, in which they and other government officials agreed to invoke a special legal provision allowing them to back uninsured deposits at SVB and Signature. No, deposits at First Republic will now simply become deposits at Chase Bank. Did the government back uninsured deposits at First Republic?
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That obviously didn’t succeed at saving the bank, but it did give officials a lot more time to figure out how to handle the foundering lender, which essentially became a zombie bank - meaning it was basically insolvent but being propped up by others - until it was seized and then sold by the FDIC. And the three lenders all failed to prepare for rising interest rates, which made a large chunk of their government bonds and other assets plunge in value.įirst Republic experienced a run at the same time as the other two, but it was able to limp along longer because a slew of big banks - including JPMorgan - collectively deposited $30 billion there in an effort to stem the panic. That made their customers unusually panicky when questions about the banks’ solvency cropped up.
Each catered to companies and wealthy individuals whose balances far exceeded the $250,000 deposit insurance limit, which meant a huge majority of those funds weren’t backed by the FDIC. The three regional lenders - SVB, Signature and First Republic - suffered from similar issues. How are First Republic’s troubles connected to what happened to the other lenders in March?
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