Has the US quelled the banking crisis with First Republic bailout?

It is the third American bank to be bailed out in two months, and this is having an impact on confidence levels and on the country’s bank deposits as a whole

A First Republic Bank branch in San Francisco on April 26, 2023.
A First Republic Bank branch in San Francisco on April 26, 2023.Jeff Chiu (AP)

The bailout of First Republic Bank should be the last in the wave of bank failures that has shaken the United States this spring. At least that is the hope of Jamie Dimon, CEO of JPMorgan Chase, which will take over the failed bank in a deal where the losses are split between the private sector (i.e. J.P. Morgan) and the Federal Deposit Insurance Corporation. The end of the problems for U.S. regional banks is near, Dimon said. The markets also seemed to believe so, with all due caution.

Following the second-largest bank failure in the U.S. since 2008, investors had been counting on First Republic’s seizure since last Friday, pending details. The reaction on Monday was one of resignation and relief, rather than euphoria. The mood boosted JPMorgan Chase shares, which rose more than 3% in a positive session on Wall Street, the only major stock exchange open on May Day.

The biggest declines in share price in the banking sector were felt by the banks that did not take over First Republic after authorities auctioned it off. Citizens and PNC Financial recorded drops of around 5% early in the trading day. Credit default swaps (CDS), a tool to mitigate the risk of default and one of the major indicators of financial stress, also remained calm yesterday.

Jamie Dimon said Monday that “the system is very, very solid.” The Treasury and the Federal Reserve also expressed satisfaction with the operation, which turned the country’s largest bank into First Republic’s rescuer.

With the threat of financial instability now under control, it remains to be seen whether the U.S. financial system has turned the page for good. Restoring confidence is not going to be an easy task, even less so after the Federal Reserve recently acknowledged errors in its supervision of Silicon Valley Bank.

First Republic is the third U.S. bank to be bailed out in two months, and this is having an impact on the country’s bank deposits as a whole. There is an ongoing debate on how best to protect people’s savings, and even the FDIC is considering ways to improve coverage, now capped at $250,000 per customer. A mistrust of the system that erupted with Silicon Valley Bank’s meltdown has left U.S. deposit volume at its lowest level since July 2021.

First quarter results are providing eye-opening figures: Charles Schwab lost $41 billion in deposits in the first three months of the year, 11%, and Western Alliance saw 11.3% of its deposits evaporate during the same period. The declines were more modest for Zions Bank and Regions Financial, around 3%.

At the other end of the spectrum, JPMorgan Chase has benefited from this distrust and increased its own deposits by $37 billion in the quarter. The bailout of First Republic should in any case help stabilize the deposits of medium-sized banks, and thus those of the banking sector as a whole.

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