By Sanjeev Oak

The financial crisis in American banks persists, and First Republic Bank has now succumbed to its impact. Just two months ago, three U.S. banks collapsed within 48 hours, but no substantial lessons were learned by the authorities. This time, First Republic Bank lost $100 billion in deposits over the last three months, leading to its shutdown. JPMorgan Chase acquired the bank after an auction.

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The Crisis Unfolds

The turmoil began earlier this year when Silicon Valley Bank and two other banks collapsed in March. At that time, a coalition of 11 banks infused $30 billion into First Republic Bank to stabilize it. However, on Monday, the bank reported losing $100 billion in deposits during the first quarter, triggering a massive selloff of its shares, which plummeted by 97% by Friday.

On Sunday, regulators handed over control of First Republic Bank to JPMorgan Chase through a bidding process. JPMorgan will reopen all 846 branches across eight states under its banner, and depositors’ money will remain safe, according to the regulatory board.

As of April 13, First Republic Bank held $229 billion in total assets and $104 billion in deposits. However, its market capitalization collapsed to $888 million on Thursday, falling below $1 billion for the first time since its peak of over $40 billion in November 2021.

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Lack of Government Intervention

The downfall of First Republic Bank mirrors the earlier collapse of Silicon Valley Bank, which primarily catered to startups. Despite clear warning signs earlier this week, the U.S. administration took minimal action to save the bank. The White House issued a statement on Thursday, saying they were monitoring the situation and would not allow the bank to fail. However, by then, it was already too late.

Regulators officially seized the bank early Monday morning, transferring its assets and deposits to JPMorgan Chase. Analysts believe that without swift intervention, the crisis may deepen, potentially endangering the broader banking sector.

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The Role of Rising Interest Rates

The aggressive interest rate hikes implemented by the U.S. Federal Reserve since November to combat inflation have directly impacted banks, causing the value of deposits to decline. Analysts warn that over 190 regional banks are now at risk. The Federal Reserve is expected to announce another interest rate hike next month, further intensifying the challenges for the banking sector.

First Republic Bank’s failure marks the second consecutive month of significant bank closures, heightening fears of systemic instability. With customers withdrawing over $100 billion in deposits in just three months, this crisis is considered the most severe since the 2008 financial meltdown.

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Moody’s Warning

After the crisis began in March, ratings agency Moody’s downgraded First Republic Bank’s credit rating, citing concerns over uninsured deposits, rising interest rates, and inadequate regulatory oversight. Analysts argue that the bank’s collapse is not just a management failure but also highlights systemic weaknesses in the banking infrastructure.

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Broader Market Impact

The broader banking sector has been rattled by the collapse. Shares of PacWest Bancorp, Western Alliance Bancorporation, Zions Bancorporation, brokerage Charles Schwab, and even JPMorgan have been affected by market instability. Analysts warn that liquidity concerns, similar to what happened during Silicon Valley Bank’s closure, will likely persist throughout the year.

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Call for Credit Limit Increase

During the collapse of Silicon Valley Bank, the Federal Deposit Insurance Corporation (FDIC) witnessed a record withdrawal of $40 billion in a single day. This liquidity crunch is now impacting the U.S. Treasury, which analysts fear could run out of funds by June instead of July as initially estimated.

To mitigate further economic fallout, there have been calls for Congress to increase the credit limit for the Federal Reserve. Without such action, liquidity concerns will worsen, pushing investors to seek safer alternatives.

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Warning from Treasury Secretary

Treasury Secretary Janet Yellen has warned that failing to raise the credit limit could trigger a major economic disaster. If interest rates continue to rise, unemployment will surge, and all forms of borrowing will become more expensive. “Raising the debt ceiling is Congress’s responsibility,” Yellen emphasized, adding that failure to do so could jeopardize investments and impact every level of the economy.