Second Largest US Bank Failure California Seizes First Republic
Second Largest US Bank Failure California Seizes First Republic
In a major development, First Republic Bank has been seized by California regulators after private rescue attempts failed. This marks the second largest bank failure in U.S. history.
JPMorgan has agreed to take over First Republic's deposits worth approximately $92 billion and purchase most of its assets. To avert a disastrous collapse, the Federal Deposit Insurance Corporation (FDIC) will share losses with JPMorgan on its loans. The deposit insurance fund is estimated to incur a cost of around $13 billion.
Last week, the bank was thrown into crisis when customers withdrew $102 billion in deposits in the aftermath of the failure of Silicon Valley Bank and Signature Bank in March.
While this takeover has some positives, such as ensuring depositors are made whole above the FDIC limit, creating some short-term financial stability and calm, and regulators acting swiftly to find a resolution, there are some concerns as well.
The concentration of banks in the U.S. has been increasing over the past decades, with tens of thousands of banks disappearing and leaving only around 4100 banks. This increases concentration risks. Additionally, small to medium businesses and vulnerable and traditionally excluded groups may be at risk of losing access to banking services as big banks may not have incentives to service profitable or perceived risky customers.
The increasing concentration of big banks does not promote competition and innovation within the banking sector. While big banks like JPMorgan can absorb bad or underwater assets and take over smaller banks, the question arises as to why they should have to. It remains to be seen what details emerge about this in the coming days.
It is important to note that this deal does not change the rates recession and regulatory headwinds that regional banks are facing.
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