California-based First Republic is already the third bank that the US authorities have taken over within a couple of months.
The US authorities again took over the bank, which had drifted into crisis. Most of First Republic Bank’s operations will be sold to major bank JP Morgan, the country’s deposit authority said on Monday.
It is the second largest bank failure in US history.
First Republic is already the third bank that the authorities have taken over in two months. In March, Silicon Valley Bank, which financed technology companies, and New York’s Signature Bank went bust.
The collapse of First Republic does not seem to have caused panic in the market, but it still raises several questions about the current state of the banking industry and potential risks.
In this article, we collected the answers to four questions about the situation in the banking sector.
Why did another US bank fail?
The reasons behind the collapse of First Republic are the same as the other two failed banks. Rapidly rising interest rates have caused problems for many banks, as they have not been able to anticipate the rise in interest rates.
First Republic’s difficulties have been known for a long time. The bank’s situation started to escalate on Monday of last week, when it published its interim report. The review revealed that during the turmoil in the banking sector at the beginning of the year, the bank had lost approximately 100 billion dollars in deposits.
The number was higher than expected, says the chief analyst of the banking group Nordea Jan von Gerich. However, he emphasizes that it is not a “new wave of panic” but that the interim report and the subsequent collapse of the bank tell more about the past months.
According to Von Gerich, the collapse of US banks one after the other tells above all two things. First of all, according to von Gerich, the failed banks have been under relaxed banking regulation during the Trump administration and therefore they have been able to take big risks, which have now turned out to be mistakes.
Secondly, bank failures indicate a major change in the economic environment, i.e. a rapid rise in interest rates. Both the US central bank FED and the European central bank ECB started a series of key interest rate increases in the spring of last year in order to curb record high inflation, i.e. the general rise in the price level.
– The market environment has changed exceptionally quickly, says von Gerich.
In principle, banks benefit from the fact that the interest rate rises in their lending. However, a rapid rise in interest rates can be a problem if banks’ investments are tied to fixed-rate investments such as government bonds, in which case their value decreases when interest rates rise. This happened, for example, with the Silicon Valley bank.
Why do US bank failures also raise concerns in Europe?
Banks are not just any companies. They play a central role in the financial system, and therefore the failure of one bank can have far-reaching effects even in different parts of the world. When a bank collapses in the United States, there is also a risk in Europe that the panic will spread here as well and the banks will begin to collapse.
This kind of reaction was seen in March after the collapse of Silicon Valley Bank. Bank stocks also fell in Europe.
The problems of the giant Swiss bank Credit Suisse also began to escalate in March, and finally UBS bank bought its rival, which was on the brink of collapse.
In general, the banking sector is monitored so closely, because worries about banks can quickly be felt elsewhere as well, says chief analyst Jan von Gerich.
– The problems of the banking system have an impact on the entire economy. If money doesn’t move and confidence goes down, it will be reflected in every sector.
Are there any more faltering crisis banks in the US?
Probably, but there is no acute emergency.
Von Gerich estimates that not all effects of the rise in interest rates have been seen yet. He would not be surprised if even more US banks fail.
– Sure, there are weaker and stronger actors, but now there is no obvious next bank that will be in trouble next. However, the uncertainty has not completely disappeared.
Do Finns have reason to fear a panic in the banking sector?
Not this time.
Market reactions indicate that there is no panic in the banking sector. There are no signs that the sale of First Republic to JP Morgan will set off the kind of turmoil in the banking sector that the collapse of the Silicon Valley bank in March.
It is also good to remember that the United States and Europe have different banking regulations.
In Europe, banks’ solvency and stability are regulated and closely monitored. Therefore, the threat of a banking crisis has been considered relatively small in Europe and Finland.
The topic can be discussed until Wednesday, May 3, at 11 p.m.
Listen to the March episode of Uutispodcast about the fear of the banking crisis below.