10 months ago • 2 mins
What’s going on here?
JPMorgan (JPM) snapped up troubled lender First Republic (FR) this week – but that’s just a Band-Aid on a wounded economy.
What does this mean?
FR has been teetering on the edge of disaster ever since Silicon Valley Bank (SVB) collapsed back in March. And sure, help was at hand – like a $30 billion cash infusion – but even that couldn’t shore up customers’ confidence. See, first-quarter results revealed a near 50% drop in deposits, and that sent FR’s shares into a nose-dive – going into freefall till regulators cried “enough” and arranged for JPM to scoop up the lender’s assets. With that, FR claimed the dubious honor of the second-biggest bank failure in US history – dethroning SVB after just a month, and becoming the fourth small lender to crumble since early March.
Why should I care?
Zooming in: Bigger isn’t better.
Regulators picked JPM’s offer because it was the only firm ready to gobble FR up whole: all the others proposed messier breakups. But while the authorities solved one problem, they might’ve fueled another. See, regulators have tried to avoid making behemoths like JPM bigger in the past, worried about increasing their “too big to fail” status. And now JPM – already the biggest US bank, with over 10% of the country’s bank deposits to its name – has just got even bulkier. That could create a whole host of problems: for one, risky bets seem far less risky when you know the government will bail you out of any trouble.
The bigger picture: Lend me your ears.
Another bank biting the dust is sure to have repercussions, with investors warning that super-cautious lending could worsen the slowdown. Take Europe: recent data shows eurozone business lending fell at the fastest rate since 2008. Combine that with stricter regulation – especially for smaller banks – and you’ve got a recipe for dampened demand and sluggish growth.
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