Even after the sale of First Republic, investors are worried about challenges that regional banks still face, imperiling the economy.
Wall Street is still on edge
After JPMorgan Chase secured a deal to buy the embattled First Republic, the banking giant’s chief, Jamie Dimon, asserted that the market turmoil set off by Silicon Valley Bank’s collapse was at an end. “This part of the crisis is over,” he told analysts on Monday.
But Wall Street isn’t convinced yet, as investors worry that potential new regulations and constrained lending could endanger the fragile economy. That skepticism was readily apparent at the Milken Institute Global Conference, a gathering of high-powered financiers in Los Angeles: “There’s a tendency to breathe a sigh of relief on mornings like this,” David Hunt of PGIM, a global asset manager, said in his opening remarks. “Actually, we are just getting started.”
How fragile are regional banks? Analysts say First Republic’s problems were unique and not shared more widely across the sector. That view was also reflected in how little the S&P 500 financials sector moved on Monday after the bank’s sale was announced.
But smaller lenders do face significant concerns. They account for about 80 percent of commercial real estate mortgages and 45 percent of consumer lending, according to Goldman Sachs. That leaves them exposed to further drops in office property values and consumer spending — which could lead to a wider credit crunch.
Watch out for short sellers. Hedge funds that bet stocks will fall scored a mammoth return on First Republic’s demise. (By last Friday, over a third of the bank’s shares were held by short sellers.)
Those investors have also taken aim at other regional lenders, including Bank OZK, Western Alliance and Zions Bancorp, and have booked $5.3 billion in mark-to-market profits on such stocks in the year through last Friday, according to data from S3 Partners.
The outlook for revamped bank regulation remains hazy. The F.D.I.C. on Monday called on Congress to consider insuring a wider array of deposits, to help forestall future bank runs. And Senator Elizabeth Warren, Democrat of Massachusetts, said First Republic’s troubles underscored a need for tighter oversight.
But the way First Republic’s sale played out — a “protracted game of chicken” between regulators and potential buyers — suggests that future bank rescues won’t be resolved quickly, potentially prolonging market uncertainty. And the Biden administration was forced to defend allowing JPMorgan, the nation’s biggest bank, to get even bigger.
Banks’ health will surely be on Fed governors’ minds on Wednesday, when they gather to begin discussing their next move on interest rate policy. The futures market this morning sees the central bank raising rates by a quarter point, but it’s unclear how much a slowing economy and bank fragility will influence their decision.
Some think the situation with banks may be a significant factor. “A greater degree of uncertainty around the impact of financial stress in the banking sector” should be a main focus of the Fed, Aichi Amemiya, U.S. economist at Nomura, wrote to investors, predicting that a rate increase on Wednesday would be the last in this tightening cycle.
More on First Republic: Monday’s deal will give JPMorgan a new crop of affluent clients to expand its flourishing wealth-management business. And two of the heirs apparent to Mr. Dimon, the JPMorgan consumer banking chiefs Marianne Lake and Jennifer Piepszak, will jointly oversee the First Republic acquisition.
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