American banks | Three bankruptcies that weigh very heavily

US authorities seized and sold First Republic Bank on Monday. It is the third bank to fail in 2023. Silicon Valley Bank and Signature Bank had collapsed in March. These three banks held assets totaling $532 billion. That’s more than the $526 billion (in today’s dollars) held by the 25 U.S. banks that failed in 2008, at the height of the financial crisis.

That year, the implosion of Washington Mutual, Lehman Brothers and Bear Stearns banks was followed by a cascade of bankruptcies in the American banking system. From 2008 to 2015, more than 500 government-insured banks failed.

Most were small or medium-sized regional banks and were taken over by other institutions, the usual fate of banks rescued by the state. Washington Mutual, heavily involved in subprime mortgages, was sold to JPMorgan Chase. It is the largest bank to fail in US history.

Since then, few banks have failed, in part thanks to stricter regulations adopted after the financial crisis. Before the current wave, the last bank failure was in 2020, during the pandemic.

But the collapse of Silicon Valley and Signature banks in March raised fears for the entire industry. Rising interest rates have eroded the value of assets on banks’ balance sheets, making them more vulnerable to large withdrawals and putting pressure on the financial system.

In March, First Republic received $30 billion from the nation’s largest banks to restore customer confidence. But depositors withdrew $102 billion in the first quarter of 2023, according to the bank’s quarterly results released Monday.

The company’s stock had fallen more than 75% last week.

Like Silicon Valley Bank, First Republic had many small tech firms among its customers, many of whom had more than $250,000 in the bank, the sum covered by federal insurance.

Since the financial crisis, regulations for the largest banks in the country include strict capital requirements: they must have sufficient reserves in the event of a crisis. Standards also govern the level of diversification of their activities.

Silicon Valley Bank CEO Greg Becker was a strong supporter of the measure. The law had reduced the minimum cash these banks had to keep in case of an emergency.

In a Friday report on the Federal Reserve’s oversight of Silicon Valley Bank, a Fed Vice Chairman, Michael S. Barr, said the central bank will “reassess” the rules for midsize banks.

The fall of Silicon Valley Bank poses a real risk of contagion, he underlines.

“The difficulties of one company can spread and have systemic consequences when the concerns spread to other companies. This is even if the company in question is neither extremely large, nor closely linked to other financial firms, nor active in essential financial services”, explains Mr. Barr.

According to the Vice Chairman of the Fed, the failure of Silicon Valley Bank is “a textbook case of incompetent management”. But he also blamed his organization’s staff for not understanding how weak the bank was and for not acting vigorously when problems were noted.