Another Bank is Failing as We Speak!
If you didn't get enough the first time with SVB's sudden collapse, there's more! Fellow regional bank First Republic Bank is seeing its stock implode and headed to FDIC receivership Friday Afternoon.
Oh no!~ It's SVB all over again. Another long weekend is in the works. Read this to understand what’s going on with the latest bank failure happening in real-time. As we speak, Frist Republic Bank is collapsing and is almost certain to be taken into receivership by the end of business tomorrow (why anyone continued holding the stock past Monday’s massive collapse in stock price - at which point the writing was clearly on the wall - is beyond me). This means the FDIC will step in and wind the bank down and likely look for a buyer for it's book of business. The FDIC insurance deposits up to $250,000, and it has been reported that First Republic has substantial deposits above that threshold. What does this mean? Will depositors see haircuts on their funds or face wipeouts on deposits over 250,000? The government will likely find a strategic buyer who, with possible assistance from the FDIC/Treasury, will take on the liabilities (deposits) and make deposits whole as part of the transaction.
The potential buyer would receive a marked-down price on its assets, comprised of performing loans and investments like treasuries and mortgage-backed securities. However, if no buyer emerges - which I believe is unlikely, this could make a good deal for a larger bank (that has a substantial cash position and liquidity) that can absorb the liabilities to buy assets on the cheap from a distressed seller - it would be a more challenging situation. The potential does exist for deposit losses. In reality, the First Republic does have asses, and those would be liquidated. The FDIC would help manage the process of giving deposit holders as much
recovery as the asset sales allow in addition to FDIC coverage. If there are deposit losses, will the government allow the bank to fail - meaning force banking clients to suffer losses truly? The federal government launched several programs after the SVB collapse and guaranteed all deposits. This was done because, in Janet Yellen's - Treasury security- words, the bank posed a systemic risk to the broader banking sector and economy due to its size and banking relationship.
What of note, Yellen also made it clear that this policy was not universal for all banks, smaller banks not designated as systemic risks (a nice, fancy, and more politically palatable way of saying the more toxic phrase with voters, Too Big to Fail, a throwback to the 2008 crisis) would not receive full guarantees on deposits beyond the FDIC insurance limit. This is a challenging situation; it is deeply unfair for one depositor to be made whole while another faces substantial losses do the size of the bank and whom the bank served as clients. SVB benefits not just from size but also due to its customer base of countless large tech startups carrying multi-million dollar deposits. The government feared that not guaranteeing the deposits would lead to a ripple contagion event where many of those start-ups and venture capital funds served by the bank would suddenly find themselves in near or actual bankruptcy - something that would cascade and almost certainly trigger a broader economic recession.
The government also wanted to instill confidence in the public that large banks would not fail to quell potential future bank runs on larger banks deeply engaged in capital markets activity that presents a dramatically more severe risk of triggering a full-blown financial collapse where credit markets freeze as all the banks stop trusting each other and then through a self-fulfilling prophecy ALL of the major banks would be faced with likely bank runs all at once, causing catastrophic economic damage that would wipe out trillions of dollars of wealth, skyrocket unemployment to 15%+, send countless Americans into poverty, and would likely take many years, even a decade plus, decade for the US economy (and global - the banking contagion would without a doubt spread to Europe and Asian banking systems). I know this because I was alive and very actively engaged with financial markets and systems in 2008, and that is precisely what happened. However, due to massive intervention, the contagion was finally arrested, leaving only several collapsed investment banks in its wake and the takeover of several more.
Again, this dual standard of who faces losses and who doesn't is not fair. It also incentivizes people to withdraw their money at smaller regional banks and give their new business to large banks (JP Morgan, Goldman, Citi, Bank of America, etc.). In some ways, this is a giveaway to the major institutions. It could also create a self-fulfilling prophecy. The incentivization could trigger sudden, large-scale withdrawals that could easily tip into bank runs if a panic, hard mentality kicked in. Thought position, but with all that set, I don't think the government has many choices - that said, I probably would announce a full backstop of all future bank insolvencies for the remainder of the year, immediately convince an emergency session and encourage Congress to swiftly pass a bill that would raise the FDIC insurance limit to 10,000,000, and I would have the fed open a lending window to all the banks in the system to access ample liquidity (letting banks swap out assets with investment losses for a period of time in exchange for cash at par value of the investments - 100% of the initial value of the investment - which would give the banks enough cash to orderly manage any withdrawal requests and go a long way in preventing future panics.
An interesting note about this has it does have a very faint connection to a bank that many of us use, is that after SVB and First Republic first started to wavier, a consortium of major banks (Goldman Sacks, Bank of America, Citi, Wells Fargo, JP Morgan, others, - and one we know locally joined them, PNC) borrowed money from the financial markets and deposited their new cash into deposit accounts at First Republic to sure up their cash position to help manage withdrawal demands and instill confidence in the business. Unfortunately, that has not worked out well, and it will be interesting to see how those deposits are handled. If there are losses in the event the government does not backstop it, what size losses will those large banks incur a billion dollars? More? We will likely find out by Sunday night. Ironically, those losses might scare depositors and trigger withdrawal surges at the big banks. However, I understand that the banks have ample cash and liquidity to meet new demands. One thing is for sure, the president and his team must be very angry. It’s not a good look to have banks fail under your watch or bail out major companies that face investment losses due to perceived mismanagement. I hope this was informative! Share if you enjoyed it or leave a comment - I’m happy to answer any questions about this situation or the banking sector and financial markets in general.