When Silicon Valley Bank and Signature Bank failed in March, U.S. authorities bailed out their depositors regardless of size. The response signaled that when a mid-sized U.S. lender collapses, doing anything less might spark a systemic crisis. The slower destruction at First Republic Bank could provide an opportunity to reverse the regrettable precedent.
Those mega-banks may yet take one for the team by converting their deposits into equity. It’s a longshot, however, as they’d become co-owners of a lender in need of a new strategy in an overcrowded market on the cusp of a credit-cycle downturn.
And while it’s never good when a business fails, there’s a potential benefit to letting First Republic go. The FDIC has so far created the impression that depositors without insurance have protection anyway. That’s dangerous, unsustainable and potentially expensive for the banks feeding the FDIC’s bailout fund. This time there may be a chance to send a stronger and more responsible message.
First Republic had $233 billion of assets at the end of March, and $104 billion of deposits compared with $176 billion at the end of December. Around $30 billion of its deposits at the end of the first quarter came from a funding injection by big lenders including Citigroup, JPMorgan, Bank of America and Wells Fargo in mid-March.
Silicon Valley Bank, owned by SVB Financial, was taken into receivership on March 10, while Signature Bank was closed by the Federal Deposit Insurance Corp on March 12. Silvergate Capital, a bank with clients including several large cryptocurrency firms, had said on March 8 that it intended to liquidate its banking operations after a sharp loss in deposits.Opinions expressed are those of the author.
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