Latest Collapse Stokes Fears of Financial Instability

Another midsize bank has collapsed in the United States. To prevent the situation from destabilizing the financial system, U.S. authorities must implement appropriate measures.

California-based First Republic Bank has failed and been placed under public control, according to an announcement from the U.S. Federal Deposit Insurance Corp. (FDIC).

As of the end of last year, the regional bank held total assets of about $210 billion (about ¥29 trillion), making it the 14th largest bank in the United States. Its collapse is the largest U.S. bank failure since Lehman Brothers went under in 2008.

There are fears that smoldering financial anxiety could flare up again. A situation that spreads to the rest of the world must be avoided.

First Republic Bank’s assets and deposits will be taken over by major U.S. bank JPMorgan Chase Bank and all deposits will reportedly be protected.

U.S. authorities must take all possible measures to ensure the stability of the financial system mainly by working to prevent the spread of confusion among depositors and by providing sufficient funds to the market.

The midsize U.S. banks Silicon Valley Bank (SVB) and Signature Bank failed in March.

At that time, credit concerns also spread to First Republic, and an unusual measure was announced in which 11 major U.S. banks deposited a total of $30 billion to support the regional bank.

However, the outflow of deposits continued, and the bank’s stock price plummeted when it revealed in an April 24 earnings announcement that the balance of deposits at the end of March had fallen by 40% from the end of last year.

One of the reasons for the series of bank failures in the United States is that the Federal Reserve Board’s rapid interest rate hikes have caused the prices of U.S. Treasury bonds and other securities held by banks to fall, resulting in huge unrealized losses.

The Fed is also responsible for supervising banks. Why was it unable to stop the chain of failures that began with SVB?

The Fed has already released its report on the collapse of SVB, admitting that it failed to swiftly supervise the bank, among other issues. The Fed has also indicated that it plans to review banking regulations.

Banking regulations in the United States were eased during the previous administration of U.S. President Donald Trump. The threshold of total assets for placing banks under intense oversight was raised from $50 billion or more to $250 billion or more. The three failed banks were not subject to such oversight.

The Fed plans to expand the scope of the oversight to include midsize banks in the future. The U.S. central bank is urged to reestablish an effective monitoring system.

The risks surrounding bank management have been increasing because the use of social media has made it easier for credit concerns to spread and deposits can be easily withdrawn with online banking. It is important to consider how bank supervision and regulation should be adapted to the changing times.

(From The Yomiuri Shimbun, May 2, 2023)