Castle of Cards and Domino Effect on US-European Banking System
Compilation by Said El Mansour Cherkaoui like they do it at Linkedin and this is from several news outlets including LinkedIn, Bloomberg, Wall Street Journal, CNBC, etc…
Domino Effect upstream in the United States Banking System and downstream in the Western and European Financial Arena and Central Banks
Banks that have failed since March 2023: Silicon Valley Bank: $ 209Bn Silvergate Bank: $ 11Bn Signature Bank: $ 118Bn Credit Suisse: $ 574Bn First Republic Bank: $ 233Bn
Once the 14th-largest bank in the United States having a worth of more than $40 billion, First Republic Bank is pretty much worthless right now!
First Republic disclosed that it had lost about $100 billion in deposits in the first quarter, following the collapses of Silicon Valley Bank and Signature Bank. That prompted a group of 11 big banks to deposit $30 billion with First Republic last month in hopes of stabilizing it. But it failed to establish the confidence of the depositors. The barrel had no bottom, all went through to the drain.
The Fed, the European Central Banks and other Central banks around the world have been sharply raising interest rates over the past year to control the inflation and reduce the risk of recession. This Ivory Tower decision focusing solely on the increase of the Interest rate has hurt the values of the large portfolios of bonds bought by banks when rates were lower, raising concerns that other firms faced similar situations.
As one of the highest Debt-GDP (123.4% in Dec 2022) ratio-based economies of the USA, it is a big challenge to establish financial stability and tackle the De-dollarization movement!
In the latest reports, US National Government Debt reached 31,459.3 USD bn in Feb 2023 against the country’s Nominal GDP reached 6,534.5 USD bn in Dec 2022.
First Republic Bank specialized in making huge mortgages, often at low rates, to wealthy borrowers, and that business model no longer works because of Fed’s aggressive interest rate policy. First Republic specialized in making huge mortgages, often at low rates, to wealthy borrowers, a business model antagonistic to the Fed’s interest rate policy favoring aggressive approach to fight back inflation and recession. First Republic bank ended up sitting on empty barrels that turned out to become explosive: huge cascade of loans that are mispriced for the current interest-rate environment.
Most of its operations will be sold to JPMorgan Chase, which will take on all of First Republic’s $103.9 billion in deposits and buy most of its $229.1 billion in assets, the FDIC said. The lender was thrown into crisis last week, when the bank’s earnings report revealed customers withdrew $102 billion in deposits in the aftermath of Silicon Valley Bank’s collapse in early March.
The deal also makes JPMorgan, the biggest bank in the U.S., even bigger.
Three of the four biggest U.S. bank failures have happened in the past two months.
Banks Bidding and Bitting on Leftovers of First Republic Feast
JP Morgan Chase, Bank of America and PNC are among the banks that have been given to Sunday afternoon to submit “their best and final takeover offers” for First Republic by the Federal Deposit Insurance Corporation.
Bank of America looked at bidding for First Republic and decided against it.
The Wall Street Journal confirmed Saturday that both Chase and PNC will log bids. The U.S. government has been preparing to seize control of the beleaguered lender and sell it off. First Republic shares are now down 97% this year as the FDIC, Treasury Department and Federal Reserve held “urgent” talks last week to save the troubled California-based lender and avoid another shock to the banking system.
Reuters reported Friday night that the FDIC was “imminently” placing the bank under receivership.
First Republic was thrown into crisis anew on Monday, when the bank’s earnings report revealed that customers withdrew $102 billion in deposits in the aftermath of Silicon Valley Bank’s collapse.
The Federal Reserve released its report Friday on SVB’s collapse — the event that triggered the deposit flight at First Republic.
WASHINGTON — First Republic Bank, San Francisco, California, was closed today by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect depositors, the FDIC is entering into a purchase and assumption agreement with JPMorgan Chase Bank, National Association, Columbus, Ohio, to assume all of the deposits and substantially all of the assets of First Republic Bank.
JPMorgan Chase Bank, National Association submitted a bid for all of First Republic Bank’s deposits. As part of the transaction, First Republic Bank’s 84 offices in eight states will reopen as branches of JPMorgan Chase Bank, National Association, today during normal business hours. All depositors of First Republic Bank will become depositors of JPMorgan Chase Bank, National Association, and will have full access to all of their deposits.
Deposits will continue to be insured by the FDIC, and customers do not need to change their banking relationship in order to retain their deposit insurance coverage up to applicable limits. Customers of First Republic Bank should continue to use their existing branch until they receive notice from JPMorgan Chase Bank, National Association, that it has completed systems changes to allow other JPMorgan Chase Bank, National Association, branches to process their accounts as well.
As of April 13, 2023, First Republic Bank had approximately $229.1 billion in total assets and $103.9 billion in total deposits. In addition to assuming all of the deposits, JPMorgan Chase Bank, National Association, agreed to purchase substantially all of First Republic Bank’s assets.
The FDIC and JPMorgan Chase Bank, National Association, are also entering into a loss-share transaction on single family, residential and commercial loans it purchased of the former First Republic Bank. The FDIC as receiver and JPMorgan Chase Bank, National Association, will share in the losses and potential recoveries on the loans covered by the loss–share agreement. The loss–share transaction is projected to maximize recoveries on the assets by keeping them in the private sector. The transaction is also expected to minimize disruptions for loan customers. In addition, JPMorgan Chase Bank, National Association, will assume all Qualified Financial Contracts.
The resolution of First Republic Bank involved a highly competitive bidding process and resulted in a transaction consistent with the least-cost requirements of the Federal Deposit Insurance Act.
The FDIC estimates that the cost to the Deposit Insurance Fund will be about $13 billion. This is an estimate and the final cost will be determined when the FDIC terminates the receivership.
When confidence in a bank or two is shaken, investors skittishly search for the next potential victim, pushing down bank stocks across the board – Hit the Road Jack
The leaders of beleaguered SVB Financial Group have stepped down, according to a regulatory filing from the California-based company. Collapsed lender Silicon Valley Bank’s former parent said CEO Gregory Becker and CFO Daniel Beck resigned earlier this month. Both executives, as well as the parent group, had recently been sued for fraud by shareholders. In March, SVB, the 16th largest bank in the U.S., was shut down by regulators amid liquidity worries and a run on deposits — becoming the biggest bank failure since 2008.
SVB Financial filed for Chapter 11 bankruptcy protection last month.
Breaking: SVB Financial Rocked: CEO Greg Becker & CFO Daniel Beck Resign in Shocking Exit!
Can SVB Financial Group bounce back after its shocking leadership resignations and massive financial collapse?
➽ Shocking exit: SVB Financial CEO Greg Becker and CFO Daniel Beck resign amid company turmoil.
➽ Massive collapse: SVB reports 96% drop in Q4 2021 profits, with estimated losses reaching $1.5 billion.
➽ Lax system exposed: Auditing firm KPMG reveals bank’s flawed tracking of loans and deposits.
➽ Expert appointed: Restructuring specialist Nicholas Grossi takes the helm as interim CFO.
➽ Rebuilding trust: SVB to address accounting issues, restore investor confidence, and navigate regulatory scrutiny.
➽ Crucial relationships: Focus on mending ties with venture capital and private equity communities for future success.
Even Newspaper with Bad News: More Layoffs at Washington Post July 27, 2022 Said El Mansour …Continue reading
The Double Sword Effect of the Interest Rate Hike when it is Used as a Weapon to Control and subdue Inflation during a period of Stagflation and Recessive industrial and Disruptive Value Chain Supply that are Amplified by the Sanctions on Russia aggravated by the use of Confrontational and Aggressive Approaches in the areas of Technological Innovation, Competitive Trade and Technological Interactions with China.
So what caused the savings and loan crisis under Reagan?
In 1979, the financial health of the thrift industry was again challenged by a return of high interest rates and inflation, sparked this time by a doubling of oil prices and exacerbated by dwindling resources of the Federal Savings and Loan Insurance Corporation (FSLIC) It was not a small problem: In 1980 there were more than 4,000 savings & loans institutions with assets of $600 billion, of which $480 billion were mortgage loans, many of them made at low interest rates fixed in an earlier era. In the United States, this was 50 percent of the entire home mortgage market.[7] In 1983, the FSLIC’s reserves for failures amounted to around $6 billion, whereas, according to Robinson (footnoted), the cost of paying off insured depositors in failed institutions would have been around $25 billion.[1] Hence, regulators were forced into “forbearance”—allowing insolvent institutions to remain open—and to hope that they could grow out of their problems.
The Savings and Loan (S&L) Crisis was a slow-moving financial disaster. The crisis came to a head and resulted in the failure of nearly a third of the 3,234 savings and loan associations in the United States between 1986 and 1995.
The problem began during the era’s volatile interest rate climate, stagflation, and slow growth of the 1970s and ended with a total cost of $160 billion; $132 billion of which was borne by taxpayers.1 Key to the S&L crisis was a mismatch of regulations to market conditions, speculation, moral hazard brought about by the combination of taxpayer guarantees along with deregulation, as well as outright corruption and fraud, and the implementation of greatly slackened and broadened lending standards that led desperate banks to take far too much risk balanced by far too little capital on hand.
First, the interest rates that they could pay on deposits were set by the federal government and were substantially below what could be earned elsewhere, leading savers to withdraw their funds.
Second, S&Ls primarily made long-term fixed-rate mortgages.
When interest rates rose, these mortgages lost a considerable amount of value, which essentially wiped out the S&L industry’s net worth.
Policymakers responded by passing the Depository Institutions Deregulation and Monetary Control Act of 1980. But federal regulators lacked sufficient resources to deal with losses that S&Ls were suffering. So instead they took steps to deregulate the industry in the hope that it could grow out of its problems. The industry’s problems, though, grew even more severe. Ultimately, taxpayers were called upon to provide a bailout, and Congress was forced to act with significant reform legislation as the 1980s came to a close.
Read more at:
Kenneth J. Robinson, Federal Reserve Bank of Dallas, Savings and Loan Crisis, 1980 –1989 –
WILL KENTON: Savings and Loan Crisis (S&L): What Happened and Aftermath, Updated July 30, 2021
Domino Effect upstream in the Banking System and downstream in the Financial Western World:
When confidence in a bank or two is shaken, investors skittishly search for the next potential victim, pushing down bank stocks across the board – Hit the Road Jack
Stellar Song Sing Hot Air Blues on First Republic Sung by Stella Song
The past week has been a challenging one for the banking industry, for First Republic, and for banking customers across the country. While it has been stressful for all of us, what I’ve seen inside the walls of First Republic has filled me with pride and gratitude. Not only are we doing business as usual, we are doing a lot more of it than usual. Within a week, our staff came together and got cross-functionly trained so we could meet the needs and fulfill the unprecedented demand of the requests from our clients. The immediate calls to action, the dedication, and the collaboration are powerful and inspiring!
We did not waste time wondering WHY this sudden disruption fell on us at First Republic. Instead, we asked WHAT. I see collective moves from everyone to perform the WHAT. We asked each others “WHAT can I do to help”. That WHAT empowers us to spring into action.
This is who we really are.
These are the eight corporate values everyone of us in our #teamfirstrepublic family is driven by and embraces each every day. We don’t just read those big words, we follow behaviors from our leaders and everyone around us. This is the power of influence.
Our leaders at First Republic don’t just talk about the values, they demonstrate them. They show us the way. They cast shadows which we naturally follow. We are not told what to do. We are led by consistent examples from the very top down. We work in an encouraging environment that promotes deep listening, to each other and to our clients, and doing the right thing.
We strongly believe in our service-centered culture, and we have deep trust of our leadership team. It’s this trust which drives to tirelesly support each other internally, and to continue serving our clients without interruption.
Despite all the turbulence and uncertainty out there, no matter what change it may bring to us, our values won’t change. Our culture at First Republic will remain intact.
Some analysts and investors are arguing that Silicon Valley Bank’s downfall is an indicator that interest rate hikes have been too aggressive.
Headline-grabbing demise of Silicon Valley Bank which collapsed stimulating instability in the U.S. and the European financial markets. What Next?
Startup Founders are blaming the Venture debt that tied Startups to one single bank
The aftermath of Silicon Valley Bank’s collapse has made an already tough dealmaking environment even worse. In 2022, venture investors committed 35% less capital globally than in 2021, per analytics firm CB Insights. In this context, some expect the share of debt in total venture funding to increase, as traditional venture capital dries up.
In fact, it’s already been gaining steam. U.S. venture debt reached $26.5 billion in value at the end of November 2022 – with 2022’s second quarter becoming the second-largest quarter in debt value in the past 10 years, according to PitchBook. This data represented nearly 2,000 deals between startups and venture-debt providers.
Rogynskyy said the appeal of venture debt financing to founders is that unlike the traditional venture-capital model, it does not involve giving up any control or equity. It does, however, come at the cost of having to pay the principal and interest on the loan back, usually over a three-year term.
“It’s a risk-reward calculus that each founder needs to make when choosing a banking partner,” he said.
But despite the plethora of options, the SVB collapse is making some founders wary of venture debt. SVB was the largest issuer of venture debt, reporting about $6.7 billion in loans to early- and mid-stage private companies in 2022, per researchers and securities filings looked at by The Information.
Shares of First Republic fell sharply on Friday, just a day after 11 major lenders deposited $30 billion at the bank in an attempt to boost confidence in First Republic and the U.S. banking system. First Republic’s stock dropped more than 30% after the regional bank suspended its dividend and revealed that it had borrowed up to $109 billion from the Federal Reserve in the days before its rescue by big banks. Some analysts believe that First Republic may need an extra capital infusion to stay independent, and that the bank could be headed for a sale.
Other regional bank stocks dipped Friday, as did shares of Wall Street banks involved in First Republic’s rescue, including JPMorgan Chase and Bank of America.
First Republic has been struggling since last week’s collapse of Silicon Valley Bank, with investors worried over its high level of uninsured deposits.
In the past week, banks have taken out nearly $165 billion in short-term Federal Reserve loans, taking advantage of two backstop tools to shore up liquidity.
“For years, First Republic lured high-net-worth customers with preferential rates on mortgages and loans. This strategy made it more vulnerable than regional lenders with less-affluent customers. The bank had a high level of uninsured deposits, amounting to 68% of deposits.
The San Francisco-based lender saw more than $100 billion in deposits fleeing in the first quarter, leaving it scrambling to raise money.
Despite an initial $30 billion lifeline from 11 Wall Street banks in March, the efforts proved futile, in part because buyers balked at the prospect of having to realize large losses on its loan book”
U.S. stocks were down Wednesday March 15. 2022 as the shockwaves from the collapseof Silicon Valley Bank reverberatedaround the world. Credit Suisse,one of Europe’s biggest banks, saw its stock fall more than 20% amid a flurry of withdrawals and a refusal by its largest shareholder to provide more funding.
Credit Suisse will borrow up to $54 billion from the Swiss National Bank, which declared the bank solvent and said it would step in to help it “if necessary.” Credit Suisse shares fell drastically Wednesday after its top shareholder said it wouldn’t invest further in the bank. However, the Saudi National Bank then declared “everything is fine,” after its earlier comments triggered panic in global markets. Problems started earlier in the week when Credit Suisse released its 2022 annual report, which didn’t inspire investor or customer confidence following in the wake of Silicon Valley Bank’s collapse.
Its 2022 annual report identified “material weaknesses” in internal controls of its financial reporting.
The report had been delayed following concerns expressed by the Securities and Exchange Commission over its previous financial statements.
Its executive board will not receive a bonus for the first time in more than 15 years.
Credit Suisse recently reported its biggest loss dating back to the 2008 financial crisis.
That in turn dragged down some major U.S. banks, including Citigroup, JPMorgan Chase and Wells Fargo. Midsize U.S. banks have also been impacted: First Republic’s credit rating was downgraded by four notches.
Bank of America has emerged as “one of the big winners” of SVB’s collapse, receiving more than $15 billion in new deposits in days.
Goldman Sachs could be paid more than $100 million for its role in an SVB bond purchase last week intended to shore up the failing bank,
Auction of Silicon Valley Bank
US bank regulators on Sunday March 12, 2023 announced a massive response to last week’s run on Silicon Valley Bank (SVB) and the risk of copycat runs against other regional banks. The Federal Reserve will provide one-year loans against banks’ security portfolios through a new Bank Term Funding Program, eliminating the risk that banks might be forced to sell their US$4.4 trillion in government securities at a loss. The Federal Deposit Insurance Corporation (FDIC), meanwhile, will make whole all SVB depositors, as well as those of the Signature Bank of New York, closed by New York state authorities on “systemic risk” grounds.
3/12/2023
All depositors at Silicon Valley Bank will be able to access the entirety of their funds in the failed bank from Monday morning, the U.S. government announced Sunday night. The Federal Reserve said it would create a new lending facility that will fortify the industry against financial risks in the wake of SVB’s Friday collapse. The Federal Reserve, Treasury and Federal Deposit Insurance Corporation announced in a joint statement that “depositors will have access to all of their money starting Monday, March 13, 2023.” In an attempt to assuage concerns about taxpayers footing the bill, the agencies said that “no losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.”
The agencies also said that they would make whole depositors at Signature Bank, which the government disclosed was shut down on Sunday by New York bank regulators. The state officials said the move came “in light of market events, monitoring market trends, and collaborating closely with other state and federal regulators” to protect consumers and the financial system.”
“We are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system,” the Fed, Treasury Department and Federal Deposit Insurance Corporation said in a joint statement.
CHANGE IN CONTINUITY
SVB, the 16th largest bank in the U.S., spiraled rapidly after announcing Wednesday it had sold part of its portfolio at a $1.8 billion loss and was trying to raise more capital.
Regulators shut SVB Friday amid a run on deposits — the biggest bank failure since the 2008 financial crisis.
SVB was a major lender to tech startups and venture capital firms.
An auction for Silicon Valley Bank is currently underway. Final bids are reportedly due on Sunday, and there remains a possibility that no deal is reached. Regulators shut down Silicon Valley Bank on Friday March 17, 2023amid liquidity worries and a run on deposits — the biggest bank failure since the 2008 financial crisis. Treasury Secretary Janet Yellen says the government won’t be bailing out the bank.
The collapse of SVB, a major lender to tech startups and venture capital firms, has left many companies and investors worried about whether they will be able to retrieve all their funds. Regulators have transferred SVB’s deposits to the newly created Deposit Insurance National Bank of Santa Clara; insured depositors will be able to access their funds from Monday.
Roku stock slumped in after-hours trading Friday after the streamer revealed that 26% of its cash — some $487 million — was held in SVB.
Investors are now worried about banks with similar profiles to SVB. First Republic saw its stock fall 34% this week; the bank says it remains “well-capitalized.”
SVB, the 16th largest bank in the U.S., spiraled rapidly after announcing Wednesday it had sold part of its portfolio at a $1.8 billion loss and was trying to raise more capital.
Many tech startups and investors are racing to understand their financial exposure and ability to keep operating and make payroll following the collapse of Silicon Valley Bank. Founded in 1983, the bank became the go-to financial institution for startups and venture capital firms. Regulators have now transferred deposits held at the bank to a newly created lender; customers with deposits up to $250,000 — the top limit of the FDIC’s standard deposit insurance — will be able to access their funds from Monday. Those with deposits above $250,000 have been told to call a hotline.
A recent filing showed that more than 90% of deposits at SVB were uninsured, reports The Verge.
Customers will be given a receivership certificate for deposits above $250,000, The Boston Globe notes, and “won’t have immediate access to the funds unless the bank is quickly acquired by a healthy rival.”
Here is the latest news on the collapse
Circle Internet Financial, which operates USD Coin, a digital stablecoin, said it had $3.3 billion tied up in Silicon Valley Bank. As a result, the virtual currency fell below 87 cents on Saturday, according to CoinDesk.
Toy store Camp had the majority of its money tied up in Silicon Valley Bank, CNN reports. In response, the company sent an email to customers informing them that they are cutting prices, and sales will be used to help continue operations.
Silicon Valley Bank has been put under the control of the US Federal Deposit Insurance Corporation, which is serving as the tech lender’s receiver.
The FDIC has offered Silicon Valley Bank employees 45 days of employment, Reuters reports, and will pay them 1.5 times their salary.
According to the FDIC, insured depositors will have access to their deposits by Monday morning, at the latest.
There is an 80% chance the U.S. will fall into a recession, according to Johns Hopkins University’s Steve Hanke, who blames the Federal Reserve for “exploding” the money supply. The central bank’s failure to manage inflation by carefully reducing the amount of money it poured into the economy during the pandemic has seen supply slow too suddenly, says Hanke, who predicts a recession in 2023. His comments come as a September CNBC survey of economists, fund managers and strategists put the chance of the U.S. slipping in recession over the next year at 52%.
The Fed raised rates again this week, opting for a hike of 0.75 percentage points for the third straight month in a bid to tackle rampant inflation.
