JPMorgan Chase CEO Jamie Dimon’s assertion that recent turmoil in the banking sector was effectively ended by the resolution of First Republic may be premature, one analyst suggested.
The Wall Street giant won a weekend auction for the embattled regional lender after it was seized by the California Department of Financial Protection and Innovation, and will acquire nearly all of its deposits and a majority of assets.
related investing news
First Republic’s demise marked the third of its kind among midsized banks since the sudden collapse of Silicon Valley Bank and Signature Bank in early March. This triggered a global crisis of confidence that eventually pushed Swiss stalwart Credit Suisse to the brink, prompting an emergency rescue by domestic rival UBS.
“There are only so many banks that were offsides this way,” Dimon told analysts in a call shortly after the First Republic deal was announced.
“There may be another smaller one, but this pretty much resolves them all,” Dimon said. “This part of the crisis is over.”
The recent financial instability has added another troubling consideration for central banks, which have been hiking interest rates aggressively to curb inflation, exposing some of the mismanaged positions held by certain banks that did not expect financial conditions to tighten so sharply.
The U.S. Federal Reserve will announce its latest monetary policy decision on Wednesday, and several of the central bank’s policymakers have reiterated their focus on dragging inflation back down to Earth even if it means tipping the economy into recession.
David Pierce, director of strategic initiatives at Utah-based GPS Capital Markets, told CNBC Tuesday that the financial sector’s frailties may be more profound than the messaging from bankers and policymakers suggests.
“If you listen to the political side of this, you would have them tell you that it really is a non-issue because it’s all covered through the FDIC insurance but money has to go into that and they’re insuring deposits well above what the insurance covers, and on the flipside of that you look at the deal that Jamie Dimon made, and they got a great deal in their purchase,” he told CNBC’s “Squawk Box Europe.”
The FDIC has estimated that the cost to its Deposit Insurance Fund of the First Republic collapse will be around $13 billion, considerably higher than the estimated $2.5 billion for Signature Bank but beneath the $20 billion estimate of resolving Silicon Valley Bank.
Pierce suggested that the sudden nature of the U.S. collapses and bailouts would indicate that the central bank and regulators may not have their fingers on the pulse with regards to ensuring smaller lenders have access to adequate money supply.
“It should not be happening in a vacuum like this and it makes me question a little bit why did they have to take them over and sell them over a weekend? Could they have funded them and given them additional capital, provided loans that would have gotten them through this hard time?” he said.
“Jamie Dimon comes out and says ‘this is it, this is the end of it, we’re all good now’ — I don’t think we can really say that yet, because we don’t know what other problems might be lurking, and obviously there are some things that are hidden, and a lot of this also comes down to there’s been some mismanagement of these banks.”
He added that the fallen banks have largely catered specifically to the tech sector, leaving them uniquely exposed to increases in interest rates having provided riskier loans to “pre-profit” companies.
However, recent Wall Street earnings showed that deposits in the aftermath have flowed heavily from smaller and mid-sized banks to the big, systemically large lenders, and Pierce suggested the two months of turmoil has “really reduced the capital in the marketplace, especially available to high-debt companies.”
The World Economic Forum’s Chief Economists Outlook, published Monday, showed chief economists by and large do not currently see large-scale systemic risk from the recent banking chaos, but they do think it will have some economic impact.
“Although the chief economists are broadly sanguine about the systemic implications of the recent financial disruption – 69% characterize it as isolated episodes rather than signs of systemic vulnerability – they point to potentially damaging knock-on effects,” the report said.
“These include a squeeze on the flow of credit to businesses and the prospect of significant disruption in property markets in particular.”
This assessment was echoed Monday by strategists at DBRS Morningstar.
“Overall, we expect limited immediate fallout from this failure, as the market was well aware of the issues adversely impacting First Republic Bank, who reported very weak results after the market closed on April 24th,” said John Mackerey, senior vice president of the Global Financial Institutions Group at DBRS Morningstar.
“Longer term, we expect further asset quality pressure as the rapid interest rate hikes cool the economy and negatively impact asset values, particularly in commercial real estate where retail and office properties are under pressure.”