My analysis is that the fall of First Republic Bank led to a lot of major bank failures in the United States. Why did this occur? When I researched, I found that expert bankers were consulted, and data were analyzed to answer these questions. All of their findings are consolidated in this article.
Learn What Really Happened During the First Republic Bank Acquisition
Silicon Valley Bank was the first to fail in March. It was the greatest bank failure in the United States since the financial crisis 2008 and the second largest in U.S. history. There was a bank run at Silicon Valley Bank, which usually takes place when a lot of customers try to draw their money immediately out of worry that the bank won’t be able to pay them back. If customers try to withdraw more money than banks have on hand, the banks will fail. Signature Bank quickly followed suit in a few days.
The First Republic Bank acquisition by JPMorgan Chase happened after being seized by federal officials. They were all among the top 30, but none were among the top five largest banks in the U.S. The top five are led by JPMorgan Chase, followed by Bank of America, Citibank, and Wells Fargo. The FDIC didn’t step in to save Silvergate Bank and closed earlier. These collapsed financial institutions have commonalities. Each one catered specifically to the technological industry, which has been cutting back on spending and personnel as it deals with the slowdown in growth brought on by the pandemic.
A Brief Explanation About the Setbacks
The three failures in 2023 (not counting Silvergate) are much fewer than the total number of banks that went under in the wake of the Great Recession 2008. In 2010, there were a record-high 156 failures. The combined wealth of Silicon Valley, Signature, and First Republic was over $548 billion as of early 2018. (The exact number is difficult to pin down because of the quick fall in a bank’s assets during a bank run). In terms of assets, this is more than any prior year’s total bank failures. In 2008, bank failures reached roughly $374 billion, setting a new high.
An Overview of the Reasons for These Bank Failures
Experts suggest the failures can be traced back to several interrelated causes.
A legal rollback
In 2018, President Trump signed a bill that would roll back some of the protections afforded by the landmark Dodd-Frank Act of 2010. The legislation’s original intent was to tighten up regulations on the financial sector so that another catastrophe like the one that triggered the Great Recession wouldn’t happen again.
Democrats in Congress, with some help from Republicans, passed Dodd-Frank, which overhauled and strengthened the nation’s financial regulatory system by imposing stricter limits on risky investments and requiring banks to undergo “stress tests” to ensure they could handle adverse economic conditions.
Dodd-Frank was revised in 2018 to keep strict control of the larger banks in place while relaxing requirements for smaller and medium-sized banks. The rewritten version of Dodd-Frank increased the minimum asset size for which tighter capital and liquidity measures are required from $50 billion to $250 billion.
All three failing banks this year were below that level, meaning they were subject to only minimal regulation. After Silicon Valley Bank failed, a legal expert at American University, Hilary Allen, told PolitiFact that while it is hard to prove legal rollback matches the bank’s collapse, it appears to have made it more likely.
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Poor risk management
As the Federal Reserve started increasing interest rates in the middle of 2022 in reaction to strong inflation, many institutions were taken off guard. Bonds are a safe investment, but when interest rates rise, their value decreases. Buyers would rather invest in higher-yielding, more recently issued bonds. Bonds held by institutions in such a scenario would have to be sold at lower prices if the holders of those bonds wanted to produce cash quickly.
The FDIC concluded that weak protections and risk management practises during the bank’s fast growth were largely to blame for Silicon Valley Bank’s failure. By 2021, the bank had grown by more than three times its 2019 size. “The Fed’s enormous increase in rates of interest captured a few banks,” said Aaron Klein, a senior scholar in economic research at the Brookings Institution in Washington, D.C. These financial institutions were under-regulated and were certain to fail.
Uninsured deposit reliance
There were inordinately large numbers of deposits in excess of the $250,000 cap on FDIC insurance at each of these banks. Customers who have a significant amount of money in an uninsured bank account are more likely to take their money elsewhere if they perceive financial trouble at the institution. Especially in the age of instantaneous information sharing via social media, this heightens the possibility of a bank run.
According to Lawrence G. Baxter, former director of the Global Financial Markets Centre, “We solved the issue of runs on retail deposits with deposit insurance, but the growth in uninsured deposits” has become troublesome. When they see problems, astute investors pull their funds elsewhere. Analysts suggested the failing banks’ significant reliance on specialised sectors, such as high-tech enterprises and bitcoin, was risky.
Sluggish management
According to the Fed’s assessment of the failure of Silicon Valley Bank, which was made public on April 28th, the bank’s supervisors “did not fully understand the vulnerabilities as Silicon Valley Bank expanded in size and complexity” and “did not take sufficient steps” to ensure the bank fixed its problems.
According to the report, “regulatory standards for SVB were too low, supervision failed to operate with adequate power and urgency, and contagion from the firm’s failure posed broader consequences that were not anticipated by the Federal Reserve’s tailoring framework.”
Final thoughts
In my opinion, there are grounds for both hope and scepticism, but no one can predict the future. The failing financial institutions share a common characteristic in terms of their focus on technology. I have observed that the economy faces headwinds, such as rising inflation that has caused the Fed to boost interest rates and may cause banks to struggle for months. If Congress fails to increase the debt ceiling in time to prevent federal defaults, the economy could experience a severe jolt.
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