Another Bank Failure – The New York Times

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The recent collapse of major banks – including First Republic Bank yesterday – has caused concerns that the US is on the brink of a financial crash, one that could resemble the 2007-8 crisis that led to the Great Recession.

For three years now, frightened bank customers and investors have rushed to withdraw their money, and the federal government has taken drastic action to prevent a wider panic that could overwhelm the rest of the financial system. Little did anyone know that this third time would be the last.

Now, the situation has stabilized. The stock market remained steady yesterday, and other banks appeared to be doing well.

But the crisis is not necessarily avoided. History is littered with examples of leaders who believed they had stopped a disaster, only to find they had overlooked the problem, including during the financial collapse of 2007-8. Some analysts worry that other banks have problems that have yet to be discovered. And the Federal Reserve, America’s central bank, is likely to continue raising interest rates – something that has caused the bank to collapse this year.

So why is this important to every American? A financial crisis can lead to less spending in the entire economy, reducing jobs and wages. It can also damage people’s investments, including retirement accounts and other savings.

Today’s newsletter will look at the bank collapse and the potential consequences for the wider economy.

Regulators seized First Republic Bank and sold it to financial behemoth JPMorgan Chase yesterday. This deal – where a larger bank absorbs a struggling bank – is typical during a crisis. What is less typical is the magnitude of this year’s failure. Combined, First Republic, Silicon Valley Bank and Signature Bank hold more inflation-adjusted assets than the 25 U.S. banks that collapsed in 2008.

All three banks, and fall, have some important characteristics in common.

First, the banks’ investments are particularly exposed to the risk of rising interest rates. As the Federal Reserve increased interest rates over the past year, many First Republic assets lost value because they remained at lower interest rates and, therefore, paid less for the bank. Meanwhile, First Republic has to pay the current higher interest rate on customer deposits. A mix of lower revenue and higher expenses is weighing on the bank’s balance sheet.

Second, the three banks have many customers with deposits that exceed federally insured limits. These depositors are more likely to be careful and ready to move money, because they know that they can lose a lot if the bank goes on.

So when First Republic’s investment strategy started backfiring, depositors started pulling out their money in large amounts – a classic bank run. Last week, First Republic announced that customers had withdrawn more than half of their bank deposits.

Finally, the fate of the three banks is tied. “The failure of Silicon Valley Bank makes Americans more concerned about the safety of their deposits,” said my friend Maureen Farrell, who covers finance. “And First Republic looks like the Bank of Silicon Valley.” The threat of further contagion is what prompted regulators and the financial system to move to try to stabilize the situation.

The problem is largely due to mismanagement at the three banks, experts say. But the regulator shared some responsibility for failing to heed earlier warnings and actions. The Federal Reserve admitted as much last week, saying that regulatory changes and “shifts in culture” leave regulators unprepared. The Fed also blamed Congress, which in 2018 reduced central bank oversight of midsize banks like First Republic and Silicon Valley Bank. The Fed is now considering tougher rules.

What happens next? Some analysts argue that the worst is over: Silicon Valley Bank, Signature and First Republic are all outliers, and their similarities make them particularly vulnerable for the current moment. So far, the government’s quick response seems to have done a good job containing the possibility of contagion.

But things could be worse. Economists say the Federal Reserve’s rate hikes will take time — possibly more than a year — to work through the economy. It was only last year that the Fed began raising rates dramatically. The three bank collapses, then, could be a start. As higher interest rates hurt the economy, other parts of the financial system may come under pressure.

Regardless of the scenario, three bank failures can cause an economic slowdown. As banks and other investors worry that they may meet the same fate as First Republic, they may act cautiously. That can translate into less money for businesses and consumers, which means less economic activity and overall growth.

Last night’s Met Gala, the fashion party of the year held on the first Monday in May, honored designer Karl Lagerfeld, whose 65-year career is the subject of a new Met’s Costume Institute exhibition.

The night included a late arrival by Rihanna, a pregnancy reveal by Serena Williams, Kim Kardashian in a pearls-and-nothing-else look and Jared Leto dressed as Lagerfeld’s cat, Choupette. (The original Choupette is not shown.)

Red carpet: Here’s the outfit, and think about how the stars interpret (or ignore) the theme.

Controversy: The exhibition did not pay attention to some of Lagerfeld’s problematic comments, The Washington Post writes.

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