Is the US banking crisis over?

Briefly: US regulators seized control of First Republic Bank early yesterday (Monday) and struck a deal to sell the majority of its assets to JP Morgan Chase. That makes First Republic the second-largest bank to collapse in US history.

It also means three of the four largest bank collapses in US history have taken place since March. And like the last two failed banks (Silicon Valley Bank and Signature Bank), First Republic had a pretty niche approach to banking:

  1. 💁 It catered to wealthy clients
  2. 💰 It often enticed them with huge, cheap mortgages, and
  3. 📈 Its wealthy clients often had bank balances that far exceeded the $250K protected by the US government’s deposit insurance agency

It all worked pretty well, until the Fed started raising rates to tame inflation: this triggered the bank failures in March, and led First Republic to start losing money on its cheap mortgages. So its customers fled for fear of losing their uninsured cash, and the bank wasn’t able to cover all their withdrawals.

The final straw was last week, when First Republic disclosed that $102B (more than half its deposits) had fled since late 2022. It was a classic bank run.

Intrigue’s take: The US is home to 4,100 banks, more than the next ~20 countries combined. So the odd collapse does feel inevitable. And when a bank teeters, Washington’s standard options are either:

  1. Offer some kind of guarantee to control the damage, but ignite a political firestorm over ‘bailouts’
  2. Ask a big bank to buy the ailing bank, but ignite a political firestorm about them getting ‘too big to fail’, or
  3. Do neither, but burn the bank’s customers and risk broader contagion.

Washington went with option #1 in March and option #2 this week, and the fallout has been pretty foreseeable so far. Option #3 is politically less likely these days, but if that changes, things can quickly get very volatile and very global.

Also worth noting:

  • JP Morgan CEO Jamie Dimon told analysts that “there may be another smaller [bank collapse] but… this part of the crisis is over.”
  • The state of North Dakota (population: 775,000) has more banks than Canada (population: 38.2 million).
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