Big Banks Team Up To Stop The Crisis

Why did 11 of the country’s biggest banks just put billions of dollars into a smaller competing bank from San Francisco?

Why did 11 of the country’s biggest banks just put billions of dollars into a smaller competing bank from San Francisco?

This is the latest development in what could turn into a full-blown banking crisis in the United States.

On Thursday, we got news that some of America’s top banks, including Bank of America, JP Morgan Chase, Citigroup and Wells Fargo, had collectively deposited $30 billion into First Republic Bank.

You see, all week, people were worried about the health of First Republic, which they thought could be the next domino to fall after three other banks, including Silicon Valley Bank, failed last week.

As you might know, those banks collapsed because they purchased interest-rate sensitive investments at a really bad time, and because they had very homogenous and fickle customers who decided to pull their deposits out all at once.

When the banks were unable to come up with enough cash to satisfy all of their customers’ withdrawal requests, they were considered insolvent and taken over by the government.

So, the weekend after that happened, which was about a week ago, panic began to build as people worried that the same thing that happened to those banks could happen to many other banks—particularly small to medium sized community and regional banks.

To prevent that, the government did two things. It guaranteed all deposits at two of the failed banks, Silicon Valley Bank and Signature Bank—not just the deposits of $250K or less that are covered by standard FDIC insurance—but deposits of more than that as well.

This put an implicit guarantee on uninsured deposits at other banks, because if the government guaranteed deposits at those two banks, it probably would do the same at other banks (though it’s not a certainty that it would).

The second thing the government did, specifically the Federal Reserve did, was create a lending program that makes it so banks can more easily convert some of their assets that had fallen in price into cash that they could then use to pay any depositors who wanted to take their money out of the banks.

These two actions taken by the government helped to stem some of the panic that built up last weekend.

But it didn’t put an end to the bank runs.

Over this past week, regional bank after regional bank has come under pressure as depositors have rushed to withdraw their money.

Even though the government took some decisive actions last weekend, people were still nervous. And the people who were particularly nervous were those with uninsured deposits of over $250,000, a category that includes individuals and businesses.

Over the past week, we saw large withdrawals from small and medium sized banks with a lot of uninsured deposits.

And no bank was hit harder by this than First Republic.

This is a bank that mostly caters to high net worth individuals. And as a result, most of its deposits are large.

At the start of the year, it had $176 billion in total deposits, and of those, 67% were uninsured.

That’s less than the 94% for Silicon Valley Bank—but a higher percentage than America’s banks as a whole, which is around 46%.

So all week, depositors have been withdrawing money from First Republic and putting it into larger banks that are considered to be more safe, or into safe investments like government money market mutual funds.

First Republic’s stock crashed 62% in a single session on Monday as investors worried that it was about to fail, but then Thursday rolled around and we got some big news.

Eleven of America’s largest banks decided to deposit $30 billion into First Republic.

What this did was immediately give First Republic a lot of cash which it could use to meet any withdrawal requests from its existing customers.

But it also gave depositors at First Republic confidence that these big banks felt good enough about First Republic to put billions of dollars worth of uninsured funds into the smaller bank.

The assumption is that the big banks either don’t think First Republic will go under anytime soon, or they think that even if it does, the government will compensate uninsured depositors at the bank. Otherwise, they wouldn’t have put $30 billion into the bank.

Thanks to this coordinated effort by the big banks, the fourth domino didn’t fall this week like it could have, and that’s good news for pretty much everyone.

On the other hand, the fact that First Republic was so close to the brink, even after everything the government did last weekend, tells you how shaky confidence in America’s regional banks has become.

You have what were perfectly healthy banks—including First Republic and many others—who are fighting for survival not necessarily because they did anything wrong, but because people and companies are suddenly questioning the safety of their uninsured deposits.

These are the same uninsured deposits they kept at these banks for years and years, but after Silicon Valley Bank collapsed overnight, they had a wakeup call.

These deposits aren’t 100% guaranteed.

So what they’re doing in many cases is taking their money and spreading it across multiple banks, and in particular, the mega banks.

These banks are so big and so important to the economy that people assume that they will never fail; they’re “too big to fail.”

As a result, we are seeing a flow of deposits from small and medium sized banks to these big banks, and that’s pushing the smaller banks to the precipice.

This isn’t good for anyone, not even the big banks because the financial system is highly interconnected. The demise of smaller banks could have ripple effects that negatively impact the bigger banks, and that’s not to mention the massive, negative economic consequences that would come from the rapid collapse of dozens of regional banks.

We’d see a sharp pullback in lending and credit creation in the economy.

It would be a crisis—a banking crisis followed by a likely recession.

The government actions last weekend and the big bank’s deposits into First Republic this week were all designed to put out this fire before it becomes something much larger.

But we don’t know if it will work.

The good news is that First Republic and some of the other regional banks have said that deposit outflows have slowed down in recent days.

Maybe that means the panic is subsiding. Or maybe it’s just the calm before the storm.

It’s really hard to say because this is all being driven by psychology. Almost overnight, people went from being confident that their funds were safe in regional banks to not being confident that that’s the case.

Can regional banks regain that confidence without an explicit guarantee from the government that all deposits at all banks are safe?

Or will the dominoes keep falling, leading to a full-blown crisis that devastates the country’s regional banks?

I don’t know what’s going to happen, but one thing that makes me hopeful is that the overall banking system, including regional banks, is in relatively good health. This isn’t 2008 when banks were holding onto toxic assets tied to subprime mortgages and no one knew which banks were most exposed to those assets.

This time around, banks are in much stronger shape, so that gives me hope that we can get confidence back much sooner.

But only time will tell how long it takes and whether more dominoes fall before that happens.