The demise of First Republic Bank raises questions about the strength of the U.S. banking system and the broader economy that relies on it. 

Monday’s shutdown marks the nation’s second-largest bank failure — First Republic Bank had nearly $230 billion in assets last month — eclipsing the Silicon Valley Bank collapse. Three of the four largest bank failures in U.S. history have taken place over the last two months. 

The Federal Deposit Insurance Corporation (FDIC) on Monday took control of the San Francisco-based regional bank and brokered its sale to JPMorgan Chase. The deal will protect deposits, likely wipe out shareholders and make the nation’s largest bank even bigger. 

First Republic’s fate was set when the bank revealed that it lost $100 billion in deposits after SVB’s collapse led to panic among wealthy clients. Its stock plummeted 75 percent last week. 

It’s unclear whether First Republic Bank is the final domino to fall in the recent banking crisis. That could hinge on whether depositors will pull their money from other institutions. 

“This part of the crisis is over,” JPMorgan Chase CEO Jamie Dimon said Monday, adding that he believes the financial system is strong but it’s possible a smaller bank could fail. 

Will more banks go under?

First Republic relied heavily on wealthy clients, with more than two-thirds of its deposits surpassing the FDIC’s $250,000 insurance limit. While that was a lower ratio than at SVB, it was higher than other regional banks, prompting depositors to pull their money over fears of losing it. 

The bank faced hefty unrealized losses on long-term Treasury bonds, which saw their value plummet after the Federal Reserve hiked interest rates, hurting its ability to raise cash to cover deposit outflows. 

While other banks don’t have as many uninsured deposits and outflows slowed after regulators took action to protect all uninsured depositors, the banking sector is flush with the same kind of paper losses on investments. 

U.S. banks had $620 billion in unrealized losses on securities at the end of 2022, according to the FDIC. A March study from professors at New York University and Wharton estimated that their unrealized losses are closer to $1.7 trillion when accounting for all loans and securities.  

The sector holds around $3.1 trillion in commercial mortgages, with small and regional banks accounting for 80 percent of those loans, according to Goldman Sachs analysts. As remote work remains popular, office buildings have lost value, raising the chance of defaults.   

Banks can typically stomach those losses unless they face a bank run or market selloff.  

An exchange-traded fund for regional banks such as First Republic dipped 2.4 percent Monday. The fund is down around 30 percent since early March. JPMorgan’s stock rose 2.3 percent on Monday.

American Bankers Association CEO Rob Nichols said that Monday’s sale will “bolster confidence in the nation’s banking system.”

Rebeca Romero Rainey, CEO of the Independent Community Bankers of America, urged policymakers on Monday to differentiate regional banks from smaller community banks, which don’t rely on uninsured deposits.

Another threat to a slowing economy

Most chief economists saw the U.S. falling into a recession in 2023 before several major banks collapsed this year. Consumer spending is falling after years of sky-high inflation and interest rate hikes aimed at slowing demand for goods and services. 

The forecast is even gloomier now that big banks are pulling back on lending to reduce risk on their balance sheets. Reduced access to credit will slow the growth of new businesses and hurt employers’ ability to invest in their company and hire more workers, experts said.

“The banking system touches many areas of our lives, from our own money to the money of the companies that employ us, and the economic stability of those companies,” Callie Cox, investment analyst at eToro, said in an email. 

“Small problems can become big problems in a flash. It’s the downside of a centralized financial system.”

Biden expresses confidence in banks

President Biden said Monday that the U.S. financial system is “safe and sound” thanks to the actions of federal regulators. He also called on Congress to hold bank executives accountable and urged regulators to strengthen regulations on big banks. 

“Folks, we have to make sure that we’re not back in this position again, and I think we’re well on our way to be able to make that assurance,” Biden said. 

In a Friday report examining the cause of the March bank failures, Federal Reserve officials pointed to a 2018 law that loosened capital requirements and stress tests for banks with between $100 billion and $250 billion in assets. The Fed is considering tougher rules as part of its authority under the law.  

Top Republicans on financial committees insisted Monday that the U.S. banking system is on solid footing and applauded the FDIC for finding a private buyer for First Republic, something it failed to do with SVB.

“Americans should remain confident in the safety of their deposits at U.S. banks,” House Financial Services Committee Chairman Patrick McHenry (R-N.C.) said in a statement. 

FDIC resolution sparks backlash

The FDIC faced backlash on Monday for authorizing a deal that effectively allowed JPMorgan Chase to purchase a major bank’s assets at a government-subsidized discount.

Critics said that regulators need to develop effective and fair guidelines to resolve bank failures, arguing that the FDIC wasn’t fully prepared for First Republic’s collapse.

“We should plan for those bank failures by focusing on strong capital requirements and an effective resolution framework as our best hope for eventually ending our country’s bailout culture that privatizes gains while socializing losses,” Jonathan McKernan, a Republican FDIC board member, said in a statement Monday. 

Karen Petrou, managing partner at policy research firm Federal Financial Analytics, wrote in a memo that the FDIC is encouraging “moral hazard that enables self-interested management, hands-off boards, insufficient supervision, and systemic risk.”

To protect First Republic depositors, the FDIC is using an estimated $13 billion from its deposit insurance fund, which is paid for by fees on banks.  

Other experts argued that the agreement could cement the idea that only “too big to fail” banks are safe, threatening deposits at smaller institutions.  

Robert Hockett, professor of law and public finance at Cornell Law School, said in an email that Congress should remove the FDIC insurance limit or risk allowing “financialized Wall Street banks to take all.”