First Republic Bank failed. It is the third bank in two months that failed. Though, following the failure of SVB and Signature Bank, Jerome Powell and Janet Yellen told the American people that the banking system was sound and secure. And First Republic Bank becomes the third bank to fail. The failure of First Republic Bank shows that our banking system remains fragile with too many deficiencies that weaken the whole financial system. Why did Silicon Valley Bank, Signature Bank, and First Republic Bank all fail?
Silicon Valley Bank (SVB)
The collapse of SVB is perhaps the largest bank failure in the United States since the global financial crisis of 2008. The bank’s vulnerability was the result of having a high proportion of uninsured deposits and a large proportion of deposits invested in hold-to-maturity securities. SVB invested much of its cash in US government bonds—traditionally one of the safest types of investment. According to James Angel, an expert on regulation of global financial markets at Georgetown University: “SVB collapsed because of a stupid rookie mistake with their interest-rate-risk management. They invested short-term deposits into long-term bonds. When interest rates rose, the value of bonds fell, wiping out the equity of the bank.”
Signature Bank’s failure resulted from regulators' concern about depositors withdrawing large amounts of money after the failure of SVB and the fear of continued contagion. As a matter of fact, the failure of Signature Bank was due to poor management. Beyond the issue of poor management, Signature Bank failed for three reasons: (1) heavy concentration in the crypto sector, especially when the crypto market was underperforming; (2) an abnormally large share of uninsured deposits; and (3) liquidity risk.
First Republic Bank
First Republic Bank’s failure was based on the mass withdrawal which was sparked by the fact that 68% of its deposits were uninsured, meaning they were above the FDIC $250,000 limit—a higher rate than many other regional banks. First Republic Bank over-relied on uninsured deposits. Moreover, its failure is also due to poor risk management, weak liquidity buffers, and unchecked rapid growth.
We see that in each failed bank, poor risk management was the key factor that led to these banks’ demise. The poor risk management that banks engaged in was based on the assumption that if they failed, they could be rescued by the FDIC. This then led them to engage in risky financial behaviors that put the entire financial system at risk. Now the big banks are going to buy First Republic Bank, which will further consolidate their position in the banking system and eventually create some oligopoly. The banking system remains very fragile and it is expected that more regional banks may fail and get absorbed by the bigger banks. The U.S. banking system needs serious revamping and restructuring.