The fall of First Republic Bank on Monday marked the third failure of major U.S. banks
The fall of First Republic Bank on Monday marked the third failure of major U.S. banks after the California-based Silicon Valley Bank and crypto-heavy Signature Bank, in just two months. JP Morgan Chase & Co. (JPM) has bought most of the bank’s assets in a fire sale after First Republic was taken over by regulators Monday morning. It is estimated that it will cost Federal Deposit Insurance Corporation (FDIC) approximately $13 billion to bear the share of losses on loans that JPM has to take over.
To deal with the crises, FDIC and the Federal Reserve on Monday evaluated the option of raising the limit of deposit insurance for business payment accounts, but they refrained from mentioning a new ceiling. FDIC Chairman Martin Gruenberg said the reason for such targeted coverage as it promotes financial stability with the best balance of risk, and failure of those accounts may impact payroll and other significant operational functions resulting in broader economic effects. Extending the coverage for payment accounts along with businesses would require substantial rise in assessments (a fee that banks contribute to Deposit Insurance Fund-DIF). The current deposit insurance limit stands at $250,000, which was temporarily raised from $100,000 in 2008 and made permanent in 2010. Regulators also evaluated another option of creating a new special vehicle, which would reassure depositors and control panic withdrawal of money.
Treasury Secretary Janet Yellen said, “Uninsured deposits would be covered in the event that a “failure to protect uninsured depositors would create systemic risk and significant economic and financial consequences.” There is also a contrarian view that increase in DIF leads to more bank failures than preventing the same because it creates a moral hazard problem. Depositors are less inclined to evaluate banks based on safety if they know they will receive their money back regardless of the outcome, and banks are more willing to undertake risky investments with their customer’s money.
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