First Republic Bank WAS known as a bank that excelled in customer service, attracting affluent clients and unique mortgage opportunities. It is now part of banking industry history as JP Morgan stepped in, and will no doubt leave in the wake many unsolved puzzles for the banking industry.
First Republic fell apart as deposits left in mass due to Silicon Valley Bank’s shutdown just a little more than one month ago. But underneath the surface, Silicon Valley Bank may have been the canary in the coalmine, as it was largely due to interest rate mismanagement, or mismatches depending on who you ask. The Fed is at least in part to blame in its mismanagement of inflation, something even the Fed is beginning to concede.
The question facing the global banking industry, and for that matter the world economy, is does the JP Morgan answer to First Republic help minimize risk of more problems or can we expect more to come this week. Community banks will get an early indication this week, as they monitor how deposits and withdrawals are impacted. For the Fed, at least it was not a direct bailout of depositors.
However, one of the unintended consequences is that the big banks once again will get bigger as JP Morgan has become even more powerful, something lawmakers have been attempting to avoid. The solution will likely make large banks the key to managing risk and thus create a more concentrated banking system of the most powerful institution. The system can also be heading to less opportunity for credit as a consequence.
The long term stability of the United States banking system is not on the minds of voters and for the mainstream media, but it should be. The strength of the economic system will depend on decisions surrounding the banking industry even before the next Presidential election. Consumer sentiment always impacts election results.