First Republic A Potential Warning Sign For Major Banks

The recent collapse of First Republic Bank may be a major sign that other financial institutions could suffer a similar fate. Stanford University professor Amit Seru recently wrote in the New York Times that the United States may be headed for a number of serious future bank failures.

Efforts following the 2008 banking collapse may have created a similar, if not worse, situation in 2023.

The professor wrote that assurances from Washington and JP Morgan Chase CEO Jamie Dimon that the worst of the current banking crisis is over “may be premature.”

Instead, he cited the sharp decline in shares of PacWest and Western Alliance shares.

“Adverse conditions have significantly weakened the ability of many banks to withstand another credit shock — and it’s clear that a big one may already be on its way,” he wrote.

Seru wrote that the sharp increase of interest rates, intended to reduce rampant inflation, is instead creating “perilous conditions for banks.”

He said that the hike in rates “can deplete a bank’s equity and risk leaving it with more liabilities than assets.”

As a result, he said that among the nation’s 4,800 banks, the decline of holdings could harm “midsize and smaller banks” especially.

The professor went even further in an interview with the British newspaper The Guardian. He said that “a lot of the U.S. banking system is potentially insolvent.”

In particular, the academic said that commercial real estate loans, which are about 25% of bank assets, could spark a wave of defaults.

Banks such as PacWest have seen their overall share price decline by about 75% so far this year.

Furthermore, the prospect of higher interest rates could leave the economy in a fragile state. Should the Federal Reserve decide not to increase rates, there is a strong chance that the inflation of the last two years could continue.

However, if the Fed does increase rates to tamp down on remaining inflation, the chances of bank failures such as First Republic and Silicon Valley Bank will increase.

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