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Banking System in Crisis: Examining Recent Failures and Regulatory Concerns
First Republic Fallout
Here is what we will be getting into today:
First Republic Acquired By JPMorgan Chase.
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FDIC Proposes Partial Revamp of American Deposit Insurance in Response to Recent Bank Failures
In the span of seven weeks, the second, third, and fourth largest bank failures in US history have occurred, with the FDIC taking significant hits to its Deposit Insurance Fund in each case. The Deposit Insurance Fund protects bank deposits and is rapidly depleting due to these failures. As a result, assessments on banks to restore the fund are expected to increase, leading to banks passing these increased costs along to their customers. These bank failures could potentially lead to a loss of confidence in the US banking system, impacting the strength of the US dollar and the financial lives of every American.
Resolution of First Republic Bank's Collapse Contrasted with SVB's
When SVB failed, the FDIC shut it down before lining up a potential buyer, leading to fears over what would happen to customers with deposits above the $250,000 level covered by federal insurance. This sparked runs at several other banks, forcing the Biden administration to declare that SVB and Signature were a systemic risk, allowing it to guarantee all deposits.
In contrast, First Republic had been teetering for weeks, and the FDIC was able to take the bank into receivership and quickly broker a deal with JPMorgan Chase to take on all the deposits, including accounts with very large balances. JPMorgan will pay $10.6 billion to the regulator, while the FDIC will provide JPMorgan with a $50 billion five-year fixed-term loan. The agency estimates the deal will cost the insurance fund $13 billion. First Republic Bank's failure highlights the stress still pervading the US banking system, with domestic deposits falling dramatically in the wake of other bank collapses. Most of the deposit losses have been in savings and non-demand deposits, and banks are borrowing a massive amount to cover their funding needs.
Recent Bank Acquisitions and Antitrust Concerns
JPMorgan Chase's acquisition of First Republic Bank has raised concerns about the bank's riskiness and its history of acquiring competitors. The bank's regulators have already ranked it as the riskiest bank in the US, and this acquisition is expected to make it even more systemically risky. The acquisition also appears to contradict President Biden's Executive Order of July 9, 2021, which promised to guard against excessive market power and enforce antitrust laws. The Bank Holding Company Act prohibits banks that control more than 10% of the total amount of deposits of insured depository institutions in the US from purchasing another bank. A caveat in the legislation allows for the market share cap to be waived if the acquisition involves one or more banks in default or in danger of default.
The Role of Short-Selling and Regulatory Concerns
Critics argue that short-selling of federally-insured banks has contributed to these recent bank failures. The newest target of short-sellers is PacWest Bancorp, which has seen its stock lose 71% year-to-date. Some argue that exceptional times call for exceptional actions, and that President Biden should suspend short-selling of federally-insured banks to protect the US financial system.
The Federal Deposit Insurance Corporation (FDIC) has proposed a partial revamp of American deposit insurance in response to the collapse of First Republic and other regional banks. The proposal aims to increase coverage for day-to-day business accounts while maintaining the current $250,000 cap on deposit insurance for individual accounts. The FDIC estimates that raising the coverage cap for business transaction accounts to $2.5 million would likely cover the needs of most small and medium-sized companies for payroll purposes. The new coverage cap for business transaction accounts is not yet specified.
The proposed targeted increase in coverage is considered more cost-effective and less likely to promote risky behavior by bank executives than eliminating the $250,000 cap altogether. Congressional approval is needed to raise the current cap or add additional coverage. The FDIC commissioned the review after concerns about the fate of SVB deposits greater than the $250,000 cap helped spark bank runs on mid-sized lenders across the country.
Uninsured domestic deposits at FDIC-covered institutions increased by nearly 10% a year between 2009 and last year, from $2.3 trillion to $7.7 trillion. The FDIC opposes a blanket guarantee for deposits, as some lawmakers have called for after recent bank failures. Unlimited insurance could accelerate inflows into banks, remove depositor discipline, and induce excessive risk-taking by lenders.
To Sum It Up
The recent failures of several large banks have put a strain on the FDIC's Deposit Insurance Fund. These failures could lead to a loss of confidence in the US banking system, impacting the strength of the US dollar and the financial lives of Americans. The FDIC's resolution of the collapses of First Republic Bank and SVB differed significantly, with First Republic being taken into receivership and brokered with JPMorgan Chase, while SVB's failure led to deposit guarantees. JPMorgan's acquisition of First Republic has raised antitrust concerns, and critics argue that short-selling of federally-insured banks has contributed to these recent bank failures. The FDIC has proposed a partial revamp of deposit insurance, aiming to increase coverage for business accounts while maintaining the current $250,000 cap for individual accounts.
For more analysis on these topics, check out these articles:
First Republic Bank & Cascading Effects
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