Why First Republic may not be the end of the crisis
After a six-week spiral, First Republic bank finally collapsed in the wee hours of Monday morning. Federal regulators seized the bank and immediately sold most of its assets to JPMorgan Chase, making fast work of what is now the second-largest bank failure in US history after Washington Mutual in 2008 (which was then acquired by you guessed it JPMorgan Chase). For those keeping track at home: Thats three US bank failures in less than two months. Whats going on? A quick refresher on how we got here: The markets seemed, if not pleased, at least not totally freaked out by the First Republic resolution. Stocks ended the day down, but only slightly. The First Republic news was just one of many closely watched events that will weigh on investors this week. (Get excited: weve got JOLTS, the Fed policy meeting and the April jobs report to look forward to.) Everyone on Wall Street appears to be drinking from the same punch bowl as Jamie Dimon, who framed the sale as a bookend to the crisis. No crystal ball is perfect, but yes, I think the banking system is very stable, Dimon said on an investor call Monday. This part of the crisis is over. Not everyone shares that optimism, of course. I spoke to Robert Hockett, a law professor and expert on public finance at Cornell University, for the decidedly less sunny take: Contrary to cheery Wall Street and Washington predictions made over the weekend, this is not the end of the March banking crisis it is still the beginning, Hockett said. To his mind, the sale just makes JPMorgan, already the nations largest bank, even bigger, and the power of the biggest Wall Street banks more concentrated. The effect of that is the hollowing out of the regional banking industry. Hockett and others argue that its time to scrap, or at least lift, the $250,000 limit on deposit insurance, and thereby stop the panic that causes depositors to flee. That idea got an extra boost on Monday, when the FDIC itself released a report advocating for an increase in the deposit insurance limit for business payment accounts. Lawmakers in DC have reportedly been in talks to, at least temporarily, expand the upper limit of the FDIC cap. While $250K is a lot for a regular person, the accounts that have bankers on edge are those belonging to businesses, which have, like, payroll and other operating expenses that easily top that amount. Theres no need for there to be those caps, Hockett said. My fear is if we dont do this really fast, what were going to see is the Jamie Dimon banks gobbling up the remainder of the regional banking industry, and that is ultimately going to bring about some kind of nationalization of the banking system. He added: Theres no way that well be able to finance production and startups and small businesses in every region of the country if the only banks we have are a few gigantic banks located either in Wall Street or San Francisco. Eliminating caps would require banks to pay more into the deposit insurance fund, though he envisions a tiered system in which large banks that take on more risk pay a higher premium. You can think of federal deposit insurance as being a bit like nuclear weapons, he said. You only have them so that you dont have to use them. Enjoying Nightcap? Sign up and youll get all of this, plus some other funny stuff we liked on the internet, in your inbox every night. (OK, most nights we believe in a four-day work week around here.)