December 11, 2023

Workers are seen inside the offices of the First Republic Bank in San Francisco, California, May 1, 2023.

Justin Sullivan | Getty Images

JPMorgan CEO Jamie Dimon asserts that the recent turmoil in the banking sector has effectively ended with a resolution first republic That may be premature, one analyst said.

The Wall Street giant won a weekend auction of the struggling regional bank after it was taken over by the California Department of Financial Protection and Innovation and will buy nearly all of its deposits and most of its assets.

The collapse of First Republic marks the third failure among midsize banks since Silicon Valley Bank and Signature Bank collapsed abruptly in early March. That sparked a global crisis of confidence that eventually pushed Swiss stalwart Credit Suisse over a cliff, prompting a bailout by domestic rival UBS AG.

“There are only so many banks that are offside in this way,” Dimon told analysts on a conference call shortly after the First Republic deal was announced.

“There might be another smaller problem, but that pretty much solves everything,” Dimon said. “This part of the crisis is over.”

The recent financial instability has added another troubling consideration for central banks, which have been aggressively raising interest rates to curb inflation, exposing some poorly managed positions held by some banks that anticipate poor financial conditions. would tighten so sharply.

The U.S. Federal Reserve is due to announce its latest monetary policy decision on Wednesday, with several policymakers at the central bank reiterating their focus on dragging inflation back to earth, even if it means a recession.

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David Pierce, director of strategic initiatives at Utah-based GPS Capital Markets, told CNBC on Tuesday that financial sector vulnerabilities may run deeper than the messages from bankers and policymakers suggest.

“If you listen to the political side of this, you’ll have them tell you it’s really not a problem because it’s all covered by FDIC insurance, but the money has to be invested, and they insure deposits that are much higher than the insurance. Scope, on the other hand, you look at the deals that Jamie Dimon did, they got a lot of benefits when they bought,” he told CNBC’s “Squawk Box Europe.”

The FDIC estimated the cost of the collapse of its First Republic deposit insurance fund at about $13 billion, well above Signature Bank’s estimate of $2.5 billion but less than the $20 billion estimate for settling Silicon Valley Bank.

Pierce said the sudden nature of the U.S. crash and bailout suggested that central banks and regulators may not have their finger on the pulse to ensure that small banks have adequate money supplies.

“It shouldn’t happen in a vacuum like this, which makes me a little bit skeptical why they have to take them over at the weekend and sell them? Could they have financed them and given them extra money if the loan would have tided them over ?” He said.

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“Jamie Dimon came out and said, ‘That’s it, it’s over, we’re fine now’ – I don’t think we can really say that yet because we don’t know what other issues are lurking , clearly some things are hidden, and a lot of it also comes down to mismanagement by these banks.”

The failed banks largely catered exclusively to the tech sector, making them especially vulnerable to rising interest rates as they made riskier loans to companies that were “not yet profitable,” he added.

However, with recent Wall Street earnings reports showing a massive post-disaster deposit flow from small and medium-sized banks to large, systemically large banks, Pierce said the two-month turmoil “did reduce the capital available in the market, especially for highly indebted companies.”

The outlook for the World Economic Forum’s Chief Economist released on Monday showed that chief economists now generally believe that the recent disruption in the banking sector does not pose large-scale systemic risks, but they do think it will have some impact on the economy.

“While chief economists were generally optimistic about the systemic impact of the recent financial turmoil — 69 percent described it as an isolated incident rather than a sign of systemic fragility — they pointed to potential disruptions,” the report said. Sexual chain reaction.”

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“Includes a squeeze on the flow of credit to businesses and, in particular, a potential major disruption in the housing market.”

Strategists at DBRS Morningstar echoed that assessment on Monday.

“Overall, we expect the immediate impact of this failure to be limited, as the market is well aware that these issues have adversely affected First Republic Bank, which reported very weak results after the market closed on April 24,” senior Vice President John McCree said. DBRS Morningstar’s global group of financial institutions.

“In the longer term, we expect further pressure on asset quality, especially in commercial real estate where retail and office properties are under pressure, as rapid rate hikes cool the economy and negatively impact asset values.”