U.S. bank closures show existing regulations need stronger enforcement, says financial expert
The abrupt closing of First Republic Bank stirred fresh anxieties about the security of the banking system, unfolding less than two months after the back-to-back, historically huge failures of Silicon Valley Bank and Signature Bank. This month all 84 branches of the former First Republic Bank opened with a new name after an emergency sale orchestrated by the Federal Deposit Insurance Corporation (FDIC).
“The sale demonstrates that federal protections for depositors are working. The FDIC response is a classic method for responding to such situations and is ‘business as usual’ per the FDIC’s charter and promise to depositors to protect them,” said Virginia Tech finance expert George Morgan. “The FDIC estimates that the agency’s total cost in supporting the acquisition will be about $13 billion (about $40 per person in the US), which the FDIC has the resources to accommodate and does not involve taxpayer funds.”
“First Republic shared some similar and distinguishing characteristics with the other banks that were closed by regulators recently,” Morgan said. “The deposit base was highly concentrated in a relatively small number of accounts. In fact, the clientele had some overlap with those of Silicon Valley Bank. With SVB, it was largely companies in the tech industry. In Republic, it appears to be the individuals who worked in that industry and related industries who had become wealthy through their endeavors.”
“When those individuals became concerned about the health of the underlying assets owned by First Republic, assets that were impaired by rapidly rising rates, depositors decided to take their deposits out and move them to other banks,” Morgan said. “However, in the aftermath, we see that the fears were not that realistic. After seeing SVB and Signature Bank, depositors could have recognized that the FDIC had lived up to its promises and would very likely do the same with First Republic.”
“In the end, we see that all depositors were protected and have now become customers safely ensconced at JPMorgan Chase,” Morgan said. “JPM grew to be the largest banking organization with such rescues over ten years ago and has done so again. Government policies have accelerated the trend toward less dispersion in the banking industry, and the consolidation is likely to continue in the foreseeable future.”
“Regulations are being considered to encourage enhanced diligence by regulators. However, additional costly and restrictive regulations imposed across a relatively healthy system would not be a wise response to several ‘rogue’ mid-sized community banks. A further tightening of credit will result. The existing regulations and historical standards of safe and sound banking need to be better enforced,” Morgan said. “Regulators should, as should so many equity investors and others in the economy, be more vigilant about risk management and not be so swayed by recent popular fads.”
About George Morgan
The Truist Professor of Finance for Virginia Tech’s Pamplin College of Business, Morgan focuses his research on the decisions regulators should make when faced with issues related to disciplining banks, as well as on the use and risks of futures trading, and the management and regulation of commercial banking organizations. Read his full bio here.
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