ALEX BRUMMER The Bell tolls for U.S. banking


Bell tolls for U.S. banking: With each failure and rescue, the prospects of maintaining confidence look ever more remote, says ALEX BRUMMER

The collapse of First Republic is one of the biggest failures in US banking history and represents a serious blow to confidence not just in American banking but in financial stability across the world.

The fantasy that the banking crisis was over and taken care of by the rescue and disposals of Silicon Valley Bank, Signature and Credit Suisse has been blown apart.

These banks were the first wave of victims of the rapid end of a period of super-easy money after a sharp rise in official interest rates on both sides of the Atlantic. 

Easy money led to foolish lending, and higher borrowing costs turned fixed interest holdings, held on many balance sheets, into loss makers destabilising the whole system.

Threat: The worst of the current banking failures has been confined to the US and Switzerland but there are no guarantees that European banks are immune

Threat: The worst of the current banking failures has been confined to the US and Switzerland but there are no guarantees that European banks are immune

The current tremors evoke memories of 2007-08 and the great financial crisis which saw regulators battling every weekend to resolve the future of failing banks before share markets opened. 

The worst of the current failures has been confined to the US and Switzerland but there are no guarantees that European banks are immune.

Rescuing First Republic is JP Morgan Chase. The bank’s veteran boss Jamie Dimon is good at this stuff. In the financial crisis he stepped in to save Bear Stearns, and snapped up Washington Mutual, giving JP Morgan a retail banking operation. Dimon showed his interest in First Republic when he orchestrated a $30billion (£24billion) deposit consortium in March. 

First Republic shares have since been in free fall and $100billion (£80billion) of deposits have fled. What is terrifying about the fate of First Republic, SVB and Credit Suisse is the rapidity of the deposit outflows.

Social media and one keystroke technology have created conditions for unseen bank runs far faster than anything in economic history.

JP Morgan effectively takes on all of First Republic’s remaining deposits (some £83billion) as well as its assets. 

If some of these assets turn out to be rotten then the losses will be shared between Dimon’s bank and the US bank insurer and regulator. 

Potential losses could top £10billion but as the books are opened there is no telling what will crawl out.

SVB catered directly to the financing needs of Silicon Valley entrepreneurs and looked after some of their wealth. 

First Republic serviced their borrowing needs, making enormous mortgage loans at low rates 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 beat back inflation in 2021, First Republic found itself sitting on a massive pile of loans lent at low rates as interest rates soared.

The startling change in borrowing costs has been far from smooth. In autumn 2022 the Bank of England was required to launch a £60billion stabilisation effort to prevent problems in the UK’s pensions system causing insolvencies. 

The fear is that similar crises could be developing in the financial system outside of traditional banking.

Financial leaders have been at pains to argue that what is happening at First Republic and elsewhere is not a repeat of the great financial crisis.

Maybe. But with each failure and rescue, prospects of maintaining the fragile confidence in large swathes of the banking system look more remote.



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