Indeed, the headline is accurate. In 2023, the combined assets of the three major banks that have failed surpass the total assets of the 25 banks that collapsed in 2008. Regrettably, the 2023 banking crisis is far from over. Recent bank failures, including the collapse of First Republic Bank, Silicon Valley Bank, and Signature Bank of New York are just the beginning according to some experts.
Additionally, a new report from Morgan Stanley predicts an economic crash worse than the 2008 financial crisis for the commercial real estate sector. The fallout from the banking crisis is expected to show up in the real economy in the next 60 to 90 days. However, some experts, such as Warren Buffet, have reassured the public that no one is going to lose money on deposits in the US.
With eight months remaining in the year, numerous banks teeter on the edge of collapse. Bank executives may offer reassurances, but we’ve heard similar statements from First Republic’s leadership just last week. Despite claims of sufficient reserves, First Republic has now failed. The FDIC’s official statement regarding the takeover is as follows:
The California Department of Financial Protection and Innovation closed First Republic Bank in San Francisco, appointing the Federal Deposit Insurance Corporation (FDIC) as receiver. To safeguard depositors, the FDIC has entered a purchase and assumption agreement with JPMorgan Chase Bank, National Association, based in Columbus, Ohio. JPMorgan Chase Bank will assume all deposits and nearly all assets of First Republic Bank.
As part of the transaction, First Republic Bank’s 84 branches in eight states will reopen as JPMorgan Chase Bank branches. All depositors will have full access to their funds. JPMorgan Chase Bank was one of several institutions invited to bid on First Republic Bank’s assets, ultimately emerging as the winner.
The deal involves JPMorgan acquiring approximately $92 billion in deposits, including $30 billion from itself and other large banks. The bank will also take on $173 billion in loans and $30 billion in securities. The FDIC has agreed to absorb most losses on mortgages and commercial loans and has provided a $50 billion credit line to JPMorgan Chase Bank.
The FDIC estimates its losses at approximately $13 billion. Shareholders of First Republic have suffered the most, losing their entire investment. As always, timing is crucial when it comes to stock market investments, a lesson First Republic’s shareholders learned the hard way.
JPMorgan Chase CEO Jamie Dimon has declared that “this part of the crisis is over.” However, the U.S. Treasury’s assurances that the banking system is “sound and resilient” should not provide much comfort. As mentioned earlier, the assets of the three banks that have failed in 2023 are greater than the total assets of all the banks that failed in 2008.
Charlie Munger, a prominent investor, has warned that many banks currently hold “bad loans,” particularly in the commercial property market. As commercial real estate prices plummet, a wave of loan defaults is likely to follow. This could lead to more bank failures, consolidation within the banking industry, and the largest commercial real estate crash in U.S. history.
