Megabanks coming together to shore up
would probably solve today’s big problem. But it may not help for much beyond that.
A potential massive infusion of deposit cash into First Republic by the biggest banks in the nation would almost surely relieve the immediate pressure on the California lender. This group may include
Chase, Bank of America,
and
The Wall Street Journal has reported—essentially the country’s largest banks. In effect, the Journal reported, the deal could be structured such that some of the influx of deposits that megabanks have received over the past week from people fleeing midsize lenders would be redirected to First Republic.
This would be a very different rescue to what happened during the 2008 global financial crisis. Nobody is buying anybody else like JPMorgan bought Bear Stearns and Washington Mutual, or like Wells Fargo bought Wachovia. First Republic also isn’t reported to be getting additional equity capital. Money would simply be moving around the banking system.
In many respects, that is a good thing. JPMorgan Chief Executive
Jamie Dimon
has often said he wouldn’t want to do what the bank did in 2008 again. Buying bad banks saddled the stronger banks with operational and regulatory headaches for many years afterward. Plus, this is a different kind of crisis. First Republic and other banks aren’t in the spotlight because of mountains of troubled loans; their immediate problem is deposit outflows.
But even this novel rescue would raise questions. For one, it may bolster the emerging narrative that the post-2008 regulatory regime has resulted in a two-tier system: Megabanks where it is always safe to deposit and do business, and everyone else.
At the same time, it might not succeed in putting to rest any fears that might arise about other smaller banks still at risk. The biggest lenders might be able to do this for one bank now. But they can hardly play that role systemically, continually sending deposits to whoever is leaking them. It also doesn’t address banks’ longer-term challenges with rising interest rates.
The structure of this deal also highlights that megabanks are hardly in need of another tidal wave of deposits. Already, the biggest banks were in some ways struggling with what to do with the surge of cash that came their way during the pandemic. More deposits lead to bigger size, which can raise capital requirements for global banks, and at times they haven’t seen sufficient loan demand to put that money to work very profitably. Buying more securities doesn’t seem like the right answer, either, in light of recent events.
Stopping bank failures should be priority No. 1 right now. But this isn’t an end to banking’s problems.
Write to Telis Demos at Telis.Demos@wsj.com
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