With news that yet another US bank has fallen by the wayside, the financial markets are understandably jittery. The failure of First Republic marks the third major US-based bank to collapse within the past two months, with Silicon Valley Bank and Signature Bank leading the way in early March.
Experts are understandably concerned about the stability of the global banking system, pointing to the 2008 financial crisis as an example of a global recession that was triggered by the banking collapse and other financial issues in the USA.
What went wrong this time?
First Republic once held assets of over $200 billion, with a clientele of wealthy individuals that reportedly included Meta CEO, Mark Zuckerberg. The previously strong regional bank catered to the super-rich, those that would be highly unlikely to default on credit payments, offering interest-only loans and jumbo mortgages. This strategy allowed it to grow rapidly through deposits from rich clientele but also became its downfall when the Federal Reserve hiked interest rates away from their historic lows.
After the fall of Silicon Valley Bank, an institution that many believed was ‘too large to fail’, investors and wealthy individuals were in a state of panic about their account deposits. Many had First Republic accounts with a significant amount contained in them, much higher than the federally insured limit of $250,000. Wary of losing large amounts from their account deposits, First Republic’s clientele started to pull their money away from the ailing bank, particularly after the issues with SVB. First Republic reported at least $100 billion had been withdrawn during March, a vastly unsustainable amount. In a bid to stabilise the financial institution and avoid another collapse, a group of large US banks deposited a £30 billion deposit injection, but even this proved ultimately futile.
As the internal cash flow crisis continued, the US government was forced to intervene. After US Treasury officials seized First Republic assets and announced that the bank was up for sale, bankers and regulators worked through the night to secure a deal.
JP Morgan Chase steps in
JPMorgan, the largest lender in the US, was announced as a buyer for First Republic at around 1 am on Monday 1st May. The Federal Deposit Insurance Corporation (FDIC) surprised everyone with the decision to allow the banking giant to become even larger by paying $10.6 billion to acquire the failing bank assets and take control of their wealthy customer accounts.
Although the purchase goes against certain standards within US law, the FDIC aims to calm stormy waters within the banking sector, as the market has been in turmoil since the collapse of Silicon Valley Bank earlier in the year. Typically, a bank cannot acquire another bank’s assets if it grants them control of more than 10% of bank deposits for the entire nation. However, this legal stipulation was waivered because the situation involved the acquisition of an already failing bank.
In a conference call after the deal was made, the Chief Executive of JPMorgan, Jamie Dimon, said that the First Republic deal was set to raise their profits by at least $500 million, and reassured analysts that “this part of the crisis is over”.
But is it really over, and what impact will this have on the financial sector, and business confidence as a whole, in the UK?
UK Government issues reassurance
The finance ministry in Britain spoke in reassuring tones in an effort to quell any major anxiety about the banking system here in the UK. A spokesperson for the Treasury told Reuters; “As the independent Bank of England has confirmed, the UK banking system remains safe, sound and well capitalised.”
So, despite the third fall of a major presence in the US financial sector in as many months, the banking system in the UK remained resilient. The Bank of England has implemented measures to increase financial security, including an improvement in risk management practices and a requirement to hold higher levels of capital. Our banks also undergo regular stress tests, to ensure they would hold steady under a wide range of economic scenarios.
The UK government say they are closely monitoring the situation to ensure that the ongoing turmoil doesn’t spread across the pond and that there are no disruptions to the overall global financial system.
Tracking insolvencies across the world
Mark Halstead, Founder and Director of Data at Red Flag Alert said that although there are comparisons between the 2008 financial crisis and the current issues banks in America are facing, there isn’t a need to panic just yet.
“In the UK it’s businesses, particularly small ones, that are taking the brunt of the ongoing economic issues. Banks in the UK appear to be fairly steady and are among some of the highest regulated in the world. What we’re seeing, when examining the data in Red Flag Alert, is a high number of businesses of all sizes suffering financial issues and sadly going insolvent,” Mark said.
“What's happening in America is partly due to the interest rate rises in the battle against post-Covid recession. Global inflation is an issue, and borrowing costs are high, slowing the economy down. Here in the UK, because of the cost of living crisis and the energy prices at an all-time high, the pressures on businesses are insurmountable and unsustainable. We’re seeing more insolvencies now than we have for nearly a decade, definitely comparable to the 2008 financial crisis. With the end of the government-backed Energy Bill Relief Scheme, we’re expecting this number to get even higher as 2023 continues. It’s all in the data.”
One thing that Mark recommends to ensure that your business is in good shape, is regularly checking your partners and customers with a financial data insights provider such as Red Flag Alert.
“What we do at Red Flag Alert is provide a way for you to undertake due diligence and monitor new and existing customers, so you can avoid offering products or services on credit to organisations that may not be in the best financial health. We’ve already seen businesses and banks that were deemed ‘too big to fail’ struggle and collapse, and when a business goes insolvent it often impacts the cash flow and supply chain of everyone connected to it.
But you can protect your exposure to this worrying outcome by monitoring your supplier and customer financial stability with Red Flag Alert.”
Red Flag Alert grew from the UK’s largest insolvency practitioner and are experts at spotting the early warning signs of insolvency. Our unique algorithm allows businesses to manage ongoing risk, and exposure, and undertake due diligence to protect yourself against fraud.
Our system provides:
- Records on over 15 million UK companies and over 350 million international companies
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