“First Republic Bank bankruptcy also increases risk for UBS-CS deal”

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Why is First Republic Bank in trouble?
The reason for this is the US Federal Reserve’s rate hikes since last year. The bank sits on a mountain of bonds that it bought before the turn in interest rates and that pays significantly less interest than bonds available today. With the increase in interest rates, customers demanded higher interest rates from the bank, which resulted in cash outflows.

In addition, First Republic Bank focused on ultra-wealthy clients, including Facebook founder Mark Zuckerberg, 38. There is deposit protection of up to $250,000 in the US – most First Republic Bank customers likely have higher amounts in their accounts and have had to wait to default, which added to the tension. Both in the eyes of customers and in the markets: the share price has lost 97 percent since the beginning of the year.

First Republic Bank has survived to this day thanks to a consortium of major US banks injecting 30 billion. The release of annual figures last week dealt the bank a fatal blow. Customers had withdrawn $72 billion in the first quarter. For comparison: Credit Suisse spent CHF 61 billion in the first quarter.

What does the recovery of First Republic Bank look like?
Much like the immediate takeover of Credit Suisse by UBS in Switzerland: US bank JP Morgan takes First Republic Bank under its wing. It receives billions of guarantees from the state. But unlike in Switzerland, officials in the US had the choice between different banks for the takeover: In addition to JP Morgan, five more banks submitted bids. Therefore, it is not a forced marriage as it is in this country.

As in Switzerland, there are concerns about the size of JP Morgan in the USA. In terms of total assets, JP Morgan was already the largest western bank in the world before the takeover – only three Chinese banks are larger. By swallowing another bank, his power increases.

Is the bank crisis over?
No, tell the experts. First Republic has become the fourth US bank to go bankrupt in recent months. Previously, Silicon Valley Bank (SVB), Signature Bank and crypto bank Silvergate were hit.

“It would be nice if the crisis ended now,” says Sergio Rossi, 55, Professor of Macroeconomics and Monetary Policy at the University of Freiburg. “But there will be more of a domino effect.” These are in no way limited to US regional banks. Rossi, among other things, sees Deutsche Bank in the whirlpool. “The uncertainty is so great that even a false rumor could cause a bank to crash.”

It’s a US regional bank – why should we care?
First Republic Bank isn’t in the same league as UBS or Credit Suisse, but it’s not tiny either: its total assets at the end of 2022 were $213 billion. After all, it’s almost twice the size of Postfinance!

The combined assets of the four US banks that have gone bankrupt since the beginning of the year amounted to approximately $550 billion. This roughly corresponds to the German Commerzbank and shows that such bankruptcies could well shake up the global financial system.

It also has direct implications for the local banking sector: it is possible for UBS, CS or Zürcher Kantonalbank (ZKB) to own shares in First Republic Bank, which are now almost worthless. Even if Swiss banks don’t invest directly, they certainly do have stakes in other international financial institutions that have stakes in First Republic Bank. “The demise of First Republic Bank also raises the risk for the UBS-CS deal,” said Sergio Rossi.

How are the markets reacting?
relatively calm. Japan’s Nikkei index rose 0.12 percent on Tuesday. The SMI closed at -0.12 percent, just slightly in the red. UBS lost 2 percent. Oscillations are small, volatility is low.

Economics professor Sergio Rossi warns that this is not yet cause for relief: “The stock market’s reaction is short-term.” It only gets bad news – like gloomy forecasts for the global economy – and tension returns. “A wave has passed, but the ocean is still stormy,” Rossi says.

How is it going from here?
The US Federal Reserve will make its next rate decision on Wednesday evening, Swiss time. Observers expect an increase of between 5 and 5.25 percent, an increase of 25 basis points. The European Central Bank’s (ECB) interest rate decision will also be announced on Thursday. In Switzerland, currency watchers led by Swiss National Bank Governor Thomas Jordan (60) won’t decide until June how interest rates will develop. But there is no turn signal in this country either. Therefore, the environment continues to be difficult for banks.

First Republic Bank will disappear from the scene for its own sake: JP Morgan has already announced that it will shelve the name.

Source :Blick