The collapse of First Republic Bank is yet another proof that the American economy is slowly but steadily going into recession, Gary Korolev, the CEO of Sovereign Wealth Management, told Sputnik
WASHINGTON (Pakistan Point News / Sputnik - 01st May, 2023) The collapse of First Republic Bank is yet another proof that the American economy is slowly but steadily going into recession, Gary Korolev, the CEO of Sovereign Wealth Management, told Sputnik.
"The economy is on a slow but steady path to a recession, this latest bank failure is just another proof that this is the case," Korolev said. "Since private banks like FRS are generally the chief providers of liquidity through the issuance of loans to companies and individuals, as deposits leave banks, the banks do not have the collateral to make as many loans, thereby reducing the amount of money in the economy and therefore making economic conditions more difficult."
US regulators closed San Francisco-based First Republic Bank, which has struggled since the collapse of Silicon Valley Bank and Signature Bank in March, the Federal Deposit Insurance Corporation (FDIC) announced on Monday, naming JPMorgan Chase as the buyer of First Republic's assets and deposits worth over $330 billion combined.
"It is expected since there is never just one cockroach," he said. "The problem which caused the first few banks, like Silicon Valley Bank, to fail, a sharp rise in short term rates and the consistently strongly inverted yield curve, are still not resolved."
Korolev believes that the US banking sector will continue to struggle as long as the inverted yield curve persists and thinks that more banks will follow the path of First Republic Bank as it is not the only bank that has these issues.
"It is likely to continue as long as the yield curve remains inverted. Regional banks are under much more pressure from deposit flight than the big money center banks like JP Morgan, Bank of America and Wells Fargo since depositors see these bigger banks as too big to fail," he said.
He noted that banks need an upward sloping yield curve in order to pay depositors a lower rate and lend out at a higher rate for a longer term and pocket the spread.
"The reason the depositors are leaving the banks is because of higher rates that can be gotten in treasuries in an investment account or in the money markets," the investor added. "Banks can't afford to pay the deposit rates for short term deposits because long term rates are still relatively low which means the banks would not make any money on the spread from lending long."
Korolev went on to say that US authorities are managing the situation better than during the Great Financial Crisis, given that they now understand the potential repercussions of acting too slowly and not doing enough.
"However, although history rhymes, it does not repeat, so the problems of this downturn are not the same as during the Great Financial Crisis. In addition, given that inflation is still a big fear for the Fed, they are afraid to lower short-term rates, which would be the quickest way to ease the market conditions for banks," he noted. "The authorities are managing the crisis well considering their limitations. Having said that, they won't be able to completely stop the bank failures. The most likely outcome is the authorities will do a decent job of containing and managing them so as not to spread throughout the economy."
When asked what the latest failures of the US banks mean for the world's economy, Korolev said, that since a banking crisis negatively affects liquidity, as banks and all other economic participants hold on to their cash, defensive currencies like the yen are likely to rise relative to other currencies given both currencies are seen as defensive.
"The more important banks are to the economy of a country, in other words, the more concentrated the banking sector is in any one country, the more likely such banks are to be rescued by the government," he said. "In Europe, the banking sector is more concentrated than in the US, so as this crisis unfolds, if any more banks get into trouble besides Credit Suisse, they are more likely to be rescued. Since China just recently started stimulating after its COVID lockdown the Chinese economy appears to be on a better footing than the US or Europe at this point."
As of April 13, First Republic Bank had about $229.1 billion in total assets and $103.9 billion in total deposits, according to the FDIC.
As part of the transaction, First Republic Bank's 84 offices in eight states will reopen as branches of JPMorgan Chase Bank.
All depositors of First Republic Bank will become depositors of JPMorgan Chase Bank, and will have full access to all of their deposits, the statement noted.
The FDIC said it will continue to insure deposits at an estimated cost of about $13 billion to its insurance fund.
Silicon Valley and another US bank, Signature, were the first lenders to collapse in March after a customer deposit run triggered by concerns about the solvency of the two institutions. A third bank, First Republic, was also hit by deposit runs but managed to stay afloat with a capital infusion of some $30 billion from the nation's largest banks, including JPMorgan Chase.
