- JPMorgan won the weekend bid for the regional lender after it was seized, and will buy all of its deposits and the majority of its assets.
- “There might be one more little thing, but this solves it all,” CEO Jamie Dimon said.
- David Pearce, director of strategic initiatives at Utah-based GPS Capital Markets, told CNBC on Tuesday that the financial sector’s weaknesses may be deeper than the messages from bankers and policymakers.
Workers are seen inside the First Republic Bank office in San Francisco, California on May 01, 2023.
Justin Sullivan | Good pictures
JPMorgan Chase CEO Jamie Dimon’s claim that the recent turmoil in the banking sector has effectively ended the first Republican resolution, one analyst suggested.
The Wall Street firm won a weekend auction for the troubled regional lender after it was seized by the California Department of Financial Protection and Invention and will take over all of its deposits and most of its assets.
First Republic’s demise marks the third time among mid-sized banks since the sudden collapse of Silicon Valley Bank and Signature Bank in early March. It triggered a global crisis of confidence that eventually pushed Swiss stalwart Credit Suisse to the brink, prompting an emergency bailout by domestic rival UPS.
“There are only so many banks that were offsides in this way,” Dimon told analysts shortly after the First Republic deal was announced.
“There might be one more little thing, but this solves it all,” Dimon said. “This part of the crisis is over.”
Recent financial instability has added yet another troubling consideration for central banks that have been aggressively raising interest rates to control inflation, exposing mismanagement positions at some banks that did not expect financial conditions to tighten sharply.
The U.S. Federal Reserve will announce its latest monetary policy decision on Wednesday, and many of the central bank’s policymakers have reiterated their focus on bringing inflation back down to earth, even as it plunges the economy into recession.
David Pearce, director of strategic initiatives at Utah-based GPS Capital Markets, told CNBC on Tuesday that the financial sector’s weaknesses may be deeper than the messages from bankers and policymakers.
“If you ask the political side of it, they have to tell you that it’s not really an issue because it’s all covered by FDIC insurance, but the money has to go into it, and they insure more than the deposits. The insurance payments, and on the other side of that is the deal that Jamie Dimon did. You see, and they got a lot of money for what they bought,” he told CNBC’s “Squawk Box Europe.”
The FDIC estimated the cost of First Republic’s deposit insurance fund to be about $13 billion, significantly higher than Signature Bank’s estimated $2.5 billion, but below the $20 billion estimate to settle Silicon Valley Bank.
Pearce suggested that the U.S. recession and bailouts could keep the Fed and regulators on their toes in making sure small lenders get enough money.
“It shouldn’t happen in a vacuum like this, and it makes me question a little bit why they would pick them up and sell them on a weekend? Could they have financed them and given them additional capital, could they have given them loans? Did they get them through this tough time?” he said.
“Jamie Dimon coming out and saying, ‘This is it, this is the end, we’re all good now’—I don’t think we can say that yet because we don’t know what other problems there are going to be. There’s sneaking in, and obviously some things are being covered up, and some of these banks are wrong. There are also administrations.”
Banks that fail are particularly helpful to the technology sector, and they are uniquely exposed to rising interest rates by making risky loans to “pre-profit” companies.
However, recent Wall Street earnings show that deposits have largely flowed from small and medium-sized banks to large, systematically large lenders, and Bears said the two months of turmoil “really reduced capital in the market, especially available to high-leverage institutions.”
In the World Economic Forum’s Chief Economists Outlook released on Monday, chief economists don’t see a large systemic risk from the recent banking turmoil, but they think it will have some economic impact.
“Chief economists are broadly optimistic about the systemic impacts of the recent financial crisis — 69% classify them as isolated episodes rather than signs of systemic damage — pointing to potentially damaging knock-on effects,” the report said.
“These include the potential for significant disruption to credit flows to businesses and property markets in particular.”
This rating was echoed by DBRS Morningstar strategists on Monday.
“Overall, we expect limited immediate fallout from this defeat, as the market was well aware of the poor results from First Republic Bank, which posted very weak results after the market closed on April 24,” said John Macquarie, senior vice president. Global Financial Institutions Group at DPRS Morningstar.
“In the longer term, we expect further asset quality pressure in commercial real estate, where rapid interest rate hikes will cool the economy and negatively impact asset values, particularly in commercial real estate where retail and office assets are under pressure.”