Once more! In the US, the next bank goes bankrupt

For weeks she staggered, the authorities tried to save her, but now she has fallen. The First Republic is shut down by authorities and sold to the largest US bank, JP Morgan Chase, along with all of its customer deposits of $93.5 billion.

Events are similar to those in Switzerland surrounding the Credit Suisse bailout, where the federal government and UBS shared the risks. In the US, the Federal Deposit Insurance Corporation, which protects customer deposits, briefly took over the First Republic to share losses with JP Morgan. The authority currently estimates losses at $13 billion.

First Republic has major losses on its books that it has yet to report. She had many low-interest securities in her books, which lost enormously in value due to the interest rate reversal. As a result, a bank run began, with the bank losing approximately $100 billion in customer deposits in the first quarter of 2023.

The specialty of the First Republic, which has now become its downfall, was super cheap jumbo mortgages, with which the bank wanted to attract and retain high net worth clients. After the interest rate reversal, the value of these mortgages plummeted. The Silicon Valley Bank (SVB) had already speculated on low-yield and under-backed government bonds. A bank run eventually brought down the SVB.

First Republic is the second largest bank failure in US history. The largest remains the 2008 bankruptcy of Washington Mutual due to the global financial crisis at the time. This is followed by SVB and Signature Bank, which both went under in March. The US is now suffering three of the four largest bank failures of the past two months.

wave of mergers

There could be a wave of mergers, writes The Economist. There are significantly more banks in the US, measured by population, than in the EU. If these small and medium-sized banks have to offer higher interest rates to prevent customers from walking away, their profits will be squeezed.

After the collapse of the Silicon Valley Bank, stricter rules should also be introduced for them, which in turn entails costs. Many banks could therefore seek refuge in mergers. Or they are forcibly merged by the authorities. (aargauerzeitung.ch)