Wednesday, 31 May 2023

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First Republic’s crisis is not an isolated incident

First Republic’s crisis is not an isolated incident

An exec at JPMorgan Asset Management is unsure how United States regional banks are “going to operate” when the Federal Deposit Insurance Corporation (FDIC) and Federal Home Loan Bank (FHLB) emergency lending programs expire – warning that the possible collapse of First Republic Bank may cause a domino effect.

In an April 27 Bloomberg television interview, Bob Michele, CIO of JPMorgan Asset Management said that the impact of First Republic’ liquidity issues caused by significant deposit outflows isn’t “just limited” to the bank itself, but could potentially affect the entire banking industry.

Michele emphasized that this is not an isolated incident, when asked if he sees this as a “First Republic problem or a banking problem.” He stated:

“Well, I think we have both, I think it’s somewhat naïve to say that this is just limited to First Republic.”

He added that the liquidity issues faced by First Republic “should never have happened,” as banking is the “most heavily regulated capitalized industry on the planet.”

Michele believes there needs to be “continuous progress to some sort of resolution” for the impact of First Republic’s downfall to be contained, or “ringfenced,” and prevented from spreading throughout the broader financial system.

Michele blamed the “high price of everything” as a major factor leading to the recent banking crisis events, as the “bottom quartile of earners” in the United States have been “most punished,” depleting their deposit balances “just to live.”

He stated that most people’s deposit balances are now even lower than before they went into the covid pandemic.

Michele believes that a resolution is urgently needed as regional banks are “heavily dependent” on both the FDIC and FHLB.

“I think the regional banks are heavily dependent on the FDIC, they are heavily dependent on the federal home loan bank, to get additional cash, we don’t know how they are going to operate when those two programs expire.”

During the last quarter of 2022, both Signature Bank and Silvergate Bank reportedly received substantial loans from the FHLB – a consortium of 11 regional banks across the United States that provides funds to other banks and lenders – totalling nearly $10 billion and at least $3.6 billion, respectively.

However, despite the financial assistance, both banks eventually collapsed due to significant deposit outflows.

Related: Bitcoin price jumps in the wake of First Republic…

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