First Republic Bank imploded on Monday after Silicon Valley Bank and Signature Bank collapsed two months ago; all three firms had a majority of clients with account balances well above the $250,000 threshold insured by the Federal Deposit Insurance Corporation (FDIC), prompting the government-backed company to secure insured and uninsured deposits at the two latter institutions to decrease the risk of bank runs at other firms.
Investors appear unconvinced that the industry has stabilized: shares for PacWest declined nearly 25% as of early Tuesday afternoon, while shares for Western Alliance fell more than 19%, shares for Zions and Comerica each decreased 12%, and shares for KeyCorp fell 10%.
The FDIC takeover of First Republic Bank and immediate sale to JPMorgan Chase occurred days after the first quarter earnings report for First Republic Bank showed that deposits at the company had fallen 41% from $176 billion on December 31 to $104 billion on March 31. The latter amount of deposits included a $30 billion loan provided by large financial institutions such as Wells Fargo, Bank of America, and Citigroup, as well as JPMorgan Chase, a deal the federal government enabled to maintain the solvency of First Republic Bank.
Continued hesitance from investors comes despite assurances from JPMorgan Chase CEO Jamie Dimon that outflows at regional banks have largely stabilized. “There may be another smaller one, but this pretty much resolves them all. This part of the crisis is over,” he said in a call on Monday. “Down the road, there are rates going way up, real estate, recession, that’s a whole different issue. But for now, everyone should just take a deep breath.”
Assets in the banking system are $2 trillion lower than their book value as a result of Federal Reserve efforts to implement a rollback in monetary stimulus, which had been previously maintained to stimulate the economy during the lockdown-induced recession, according to a recent study from analysts at the National Bureau of Economic Research. Tumult in the commercial real estate sector, which has been challenged in recent months as companies downsize their physical office space, also poses a lingering threat to balance sheets.
Officials at the Federal Reserve recently concluded that the volatility in the financial system warrants a recession forecast for the end of the year, followed by a predicted recovery over the course of the subsequent two years. Policymakers also estimated that the historically low unemployment rate would rise toward the beginning of next year.
“If the effects of the recent developments in the banking sector on macroeconomic conditions were to abate quickly, then the risks around the baseline would be tilted to the upside for both economic activity and inflation,” minutes from a March meeting said. “If banking and financial conditions and their effects on macroeconomic conditions were to deteriorate more than assumed in the baseline, then the risks around the baseline would be skewed to the downside for both economic activity and inflation, particularly because historical recessions related to financial market problems tend to be more severe and persistent than average recessions.”