Investors have warned of more economic pain ahead following the failure of the San Francisco-based First Republic Bank (FRB).
The investors issued this warning during the Milken Institute's 2023 Global Conference in Beverly Hills, California. According to them, the Federal Deposit Insurance Corporation's (FDIC) seizure of a third U.S. regional bank threatens to constrain credit and accelerate the path toward a severe economic slowdown.
Federal authorities took over FRB on May 1, almost two months after the seizure of Silicon Valley Bank (SVB) on March 10 and Signature Bank on March 12. Rivals PNC Bank and Citizens Bank attempted to purchase the now-collapsed FRB, but failed. The assets of the collapsed San Francisco bank were immediately sold to JPMorgan Chase, alongside $93.5 billion in deposits. (Related: More bank failures coming? FDIC takes control of First Republic Bank after second-biggest collapse in nation's history.)
Ordinarily, JPMorgan – the nation's largest bank – would be barred from acquiring another lender as it controls more than 10 percent of all U.S. deposits. However, the government waived regulations to permit JPMorgan's purchase. According to the financial giant, the deal would add roughly $500 million in annual income to its earnings.
The Epoch Times reported that FRB's failure did not cause the same amount of panic as the earlier collapse of SVB and Signature Bank, despite a sell-off in some bank shares. This brought a sigh of relief from financial executives and government officials.
Many prominent investors nevertheless spoke during the conference's opening day on April 30 to warn about the repercussions of the latest bank failures. Several argued that the banks would now be forced to comply with rules that could further restrict their lending policy. The rules come as markets feel the increasing strain from the Federal Reserve's aggressive interest rate policy.
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"We're going to see a real ratcheting-up of regulation in the banking system, particularly on many regional lenders," remarked PGIM CEO David Hunt, adding that the impact of the new rules would be "quite constraining."
"What this will do is … further hinder the supply of credit that's going into the economy. And I think that we are going to see now a real slowing that begins to happen to aggregate demand."
Troubles at regional banks signal bigger issues
Katie Koch, CEO of bond fund management TCW, spoke to Bloomberg on the sidelines of the conference. She expressed concern that troubles at regional banks like FRB, SVB and Signature Bank would drag down smaller businesses.
"Small businesses rely on small banks, … [and] half of Americans are employed by small businesses," she said. This makes them vulnerable to a credit crunch, which Koch described as "a big problem – a very, very big problem."
The TCW CEO also predicted that the economy will likely head toward a deep recession by the end of the year. Thus, she advised investors to prepare for "major accidents" in the private credit market in the next 12 to 18 months.
"We have had five years where 'diligent light' became a term, and this is not going to be fun over the next five years if you arrived at it from that perspective," she told Bloomberg. Koch told investors to put more of their money into "globally systematic banks," given that regional banks face an increased risk of deposit flight.
Kristalina Georgieva, managing director of the International Monetary Fund (IMF), also graced the conference. She blamed the "complacency" of U.S. regulators for the regional bank failures.
"We know there was unnecessary deregulation … and now we saw the price to pay. We saw supervision has not been up to par," she said.
The IMF head also called for new regulations to prevent the rapid bank runs caused by depositors' ability to move money online with a single click. Georgieva remarked: "It is the speed money can move from one place to another. It goes into the territory of the unthinkable."
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Watch Lynette Zang explain the mystery behind First Republic Bank's collapse and its acquisition by JPMorgan Chase below.
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