‘When First Republic failed, investors grew wary that another shoe could drop.’
The market calm many hoped for after the sale of First Republic Bank to JPMorgan Chase did not materialize this week, as bank stock prices fell and fears that more failures could be ahead were rekindled.
The week began with the announcement early Monday that San Francisco-based First Republic had been closed by the California Department of Financial Protection and Innovation and taken into receivership by the FDIC prior to its sale.
The collapse of the $229 billion bank, the second largest in U.S. history by asset size, was quickly followed by a bank stock sell-off that seemed to hit regionals hardest. “When First Republicfailed,” CNN said, “investors grew wary that another shoe could drop.” Reuters reported that the price to insure against regional bank stock losses was spiking.
Deposits aren’t a factor? For some banks, this week’s falling stock prices seem unrelated to the deposit flight that has been a hallmark of the liquidity crisis, because their deposits have been stable. Overall, the liquidity crisis has put banks on alert about the implications of bank runs supercharged by social media and digital transactions—including their connection to reputation risk—and has heightened the focus on the traditional challenges of concentration and interest rate risk management.
In earnings reports prior to the First Republic news, several banks said they had met first-quarter expectations. But many said net interest margins would likely fall as this quarter progresses, considering the need to boost deposit interest rates to remain competitive and other factors.
The big picture. There are different perspectives to be sure, but many remain confident that the financial system does not seem headed for a shock on the scale of the Global Financial Crisis. In comments after the announcement Wednesday that the Federal Reserve was raising interest rates by a quarter point, Fed Chair Jerome Powell said that the banking sector was “sound and resilient.”