First Republic falls. Is the banking crisis restarting?
Living in the age of the "slow bank run"
Another medium-sized regional bank appears to have fallen. Yesterday morning, the FDIC was reported to be preparing to take First Republic Bank into receivership — the same fate that befell Silicon Valley Bank last month. (Update: JP Morgan is taking over FRB.) First Republic is the 14th-largest bank in the U.S., with about $212 billion in assets — about the same size as Silicon Valley Bank.
You’ll probably see some people reacting to this event with renewed panic. Some will claim that the banking crisis that began with SVB is still going strong, that the government failed to halt the problem, and that the banking system is teetering ever closer to disaster. But these folks aren’t paying enough attention to the details.
In fact, First Republic’s fall is likely just a slightly delayed part of the same March crisis that took down SVB. First Republic’s stock collapsed a few days ago, after it issued an earnings report revealing that it had lost $100B in customer deposits in the first quarter of the year. The first quarter includes March, but not April, meaning that First Republic probably saw those big outflows before the U.S. government created two new funds to backstop previously uninsured bank deposits and lend to distressed banks.
First Republic failed for some of the same reasons that Silicon Valley Bank failed. It had a fairly large percent of uninsured “jumbo” deposits — 68%, compared to SVB’s 94%. It’s a California bank that made an effort to cater to rich individuals in the tech industry. Those depositors are generally fickle in any case, but in the current crisis they were even more easily spooked, because they were scared by SVB. So basically, First Republic was running a fairly risky business to start with, and was caught in the psychological contagion from the collapse of its even riskier counterpart. All of that happened in March, and First Republic’s actual collapse happened a month later only because that was when the bank was forced to reveal how badly it had been hit. (It remains to be seen whether similar fates befell Pacific West and Western Alliance, two somewhat smaller banks who also looked shaky back in March.)
Anyway, that’s the short version of the story, and it explains why there’s no reason to panic over First Republic’s collapse (though I’m sure a few people will panic anyway). But there’s also the possibility that this event will prompt more people to move their money out of bank deposits, not in a panicky way, but in a gradual, orderly way. That would cause further weakness and headaches for the American banking system, and probably cause the economy to slow.
Why would you keep your money in a bank account anyway?
A banking crisis happens when a whole lot of people take their deposits out of bank accounts. So first let’s take a moment (i.e. this whole section) and ask why you would keep your money in a bank account at all, in the first place.
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