The ongoing global banking crisis

The ongoing global banking crisis

It is becoming increasingly clear that we are not dealing with “isolated incidents”

The First Republic Bank collapse was the second largest bank failure in US history. The largest bank failure was that of Washington Mutual in 2008. The bank’s market capitalization in February was $25 billion. Now, the value of the securities held by shareholders has simply been wiped out.

The bank faced the problem that many banks face today. It had made a very large number of low-interest loans, mainly mortgages, whereas it now faces higher borrowing costs itself, due to rising interest rates. interest that the FED has been engaging in lately as part of the effort to deal with the intense inflationary pressures of the last interval.

But, as in the case of Silicon Valley Bank, the mechanism that ultimately triggered the bank’s collapse was a massive outflow of depositors as the bank’s problems began to surface. It is estimated that the flight of deposits from the bank – which was the 14oh largest creditor of the United States – reached 100 billion dollars.

The initial attempt to prevent the collapse of the bank was made by other banks who rushed to deposit around 30 billion in the bank, but this could not reverse the situation and the course towards the collapse .

Individuals enter – saviors

To avoid the risk of depositors losing their deposits, especially if they go over the $250,000 limit, which is the guarantee limit based on federal law, it is clear that an effort has been made to activate the private sector . This was undertaken by the FDIC, the Federal Deposit Insurance Corporation, an institution financed by American commercial banks and one of the creations of the Roosevelt era and the experience of the crisis of 1929.

It was in this context that the buyer for the deposits, loans and bonds of the First Republic was finally found. It was JPMorgan Chase. And although in doing so the acquiring bank exceeded the federal holding limit of more than 10% of total deposits, the exception applicable in the event of a failed acquisition of a bank was nevertheless triggered.

All winners?

The entire development was greeted in the United States with various expressions of relief. On the one hand, the possibility of losing deposits, which would have awakened the worst memories, has been avoided. On the other hand, the entire deal did not include additional federal funding, so the Biden administration cannot be accused by Republicans of government waste.

And of course the big winner is JPMorgan Chase itself, which will pay the regulator $10.6 billion, while the FDIC itself will cost around $13 billion, while it offers also to JPMorgan a loan of 50 billion dollars over five years. JPMorgan will acquire $185 billion in interest-bearing loans and other securities and is expected to make annual profits of at least $500 million per year (some analysts estimate that the associated annual revenue could reach as much as $1 billion). Additionally, the FDIC has agreed to bear the cost of any defaulted loans.

However, despite this image, it is not at all certain that we are dealing with a “good ending, everything is fine”.

The depth of the banking crisis

To understand the magnitude of the bank meltdowns of recent months, consider that the three US banks that have collapsed in recent months (Silicon Valley Bank, Signature and First National) had total assets of $532 billion. That’s more than the combined size of all 25 bank failures from 2008 to 2022…

If we look at the fact that all of this coincides with the collapse and takeover of Credit Suisse, it becomes clear that there is a larger problem with the banks.

Obviously and in each case we can see different problems. Something else, eg. the long history of Credit Suisse problems and the problems of American banks related to the upheaval caused by the change in interest rate policy. Certainly, the fact that the bank rush has now been greatly facilitated by technology also matters, as huge sums can be transferred at the touch of a button.

But it is clear that there is something deeper. It has to do with the banking system and the state of the global economy.

Let’s not forget that bank failures are usually violent “corrections”, i.e. times when what the banks “pre-approve” – ​​such as investment, profitability, macroeconomic situation, etc. – does not correspond to what is happening in the economy.

This can be linked both to the innate tendency of the financial system towards such lags (or “bubbles”) and to problems in the global economy, as shown by symptoms such as high inflation, or – what is the most common… – a combination of both.

In this sense, the relief of the “resolution” of the issue, or the almost coercive assurances that no further collapse is expected, are more wishful thinking than reality.

The combination of inflation, the impending recession, rising interest rates (and the realignment of yields across a range of securities that are driving wider upheavals as the near-crisis of the British pension) all suggest that this is anything but the storm in the global financial system.

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