The recent takeover of First Republic Bank, the fourth US bank to fail this year, has raised concerns about the possible repercussions this new failure could have on the US and international economies. While US President Joe Biden has assured the public that the banking system remains safe, analysts are warning that this may not be the last bank failure in this turbulent time.
First Republic Bank collapse shows weaknesses in US banking system, analysts say
The recent collapse of First Republic Bank, the second-largest bank failure in US history, has raised alarm bells among analysts about the possible repercussions it could have on the country’s economy. While President Joe Biden has assured the banking system is safe, some believe the fourth bank failure in a year could show that the US banking system has systemic weaknesses.
An unnamed investment manager at a Beijing bank told the Global Times that this new slump would likely lead to more banks failing in a future liquidity crisis. He declared:
The takeover indicates that the problem is more serious than expected, as we believed that the crisis had subsided after the previous bailout.
Jamie Dimon, CEO of JPMorgan, the bank that took over First Republic, declared he thinks that “this part of the crisis is over”. However, some US analysts think otherwise.
Tomasz Piskorski, a professor at Columbia Business School, believes other banks could be at risk. He declared:
According to our calculations, nearly 200 other banks may fail, many of which are smaller (than First Republic). The problems are not over.
The Federal Reserve blamed
Several analysts believe that these bank failures are linked to the hawkish policies of the US Federal Reserve, which has continued to raise interest rates to bring inflation rates down to 2% since last year. Regarding this, Piskorski explained:
There are hundreds of banks whose current market value of assets is less than the face value of debt, and (the crisis) is mainly caused by the Fed raising interest rates.
This could lead the US government to face an insoluble dilemma, according to Gao Lingyun of the Chinese Academy of Social Sciences in Beijing. The pickle being having to raise interest rates to bring inflation rates down, but affecting the value of loans made by banks when those same rates were lower, increasing their risk of default. This, in turn, could contribute to a future recession and other bank failures in more countries, Gao warned.
What do you think of the possible repercussions of the collapse of First Republic Bank? Tell us in the comments section below.
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