Monday morning, it was announced that the FDIC had taken over First Republic Bank and sold it to JPMorgan Chase. Eleven major banks had previously infused First Republic with $30 billion in deposits to stabilize the bank after the failures of Silicon Valley Bank, Signature Bank, and Credit Suisse. This process found new urgency over the past week when First Republic revealed that uninsured deposits at the bank fell $100 billion in the first quarter. So, this deal has been in the making for several days, with a few large banks bidding on First Republic's deposits and assets. With ongoing banking turmoil creating market and economic uncertainty, how can long-term investors navigate the months ahead?
We discuss in this episode of The Wealth Effect Podcast:
💲 FDIC Bank Failure Losses
📉 Financials Sector Performance
📊 U.S. GDP Growth
Matt Faubion, CFP®
Founder - Wealth Manager
Show notes and charts:
Three FDIC-insured banks have now failed with a total of $368 billion in depositsThis banking crisis results from a failure of risk management specific to these banks and the broader tightening of financial conditions primarily due to Fed rate hikes. However, banking crises are not new, and many of the biggest market shocks since the late 19th century have been due to tremors in the financial system. The Panic of 1873, for example, occurred when one of the largest banks, Jay Cooke & Company, failed due to bad bets on railroads. Others include the Panic of 1907, the 1929 crash, the Savings and Loan crises throughout the 1980s and 1990s, the 2008 global financial crisis, and many other international crises.
All these historical episodes have in common the availability of money, the expansion of credit, and the eventual tightening of financial conditions. Like a sugar rush, a rapid increase in money and credit through the global financial system can drive asset bubbles and risk-taking in a particular market or across a whole country. Sooner or later, however, there is a sugar crash as new money creation peters out, sentiment shifts, and financial conditions tighten.
The banking crisis has been concentrated in specific regional banksToday's most important question is whether there will be broader economic instability or whether the situation is contained. After all, many surface-level parallels to 2008 are raising investor concerns, including JPMorgan Chase's acquisition of Bear Stearns in March 2008. As the nation's largest bank, it's unsurprising that it would play a role in any financial crisis. The Fed had also raised rates before 2008, and the economy appeared to be in good shape based on growth figures.
The economy grew at a slower pace in the first quarter
Finally, the broader economy continues to be stable, even if it does appear to be slowing. Last week's GDP report showed that the economy grew by 1.1% in the first quarter. This was slower than expected but was primarily due to a decline in inventories among businesses which reduced growth by 2.26 percentage points. Fortunately, solid consumption spending offset this, which added 2.48 percentage points. Overall, a slowing economy is what the Fed expects to see in a tighter rate environment.
The bottom line: Long-term investors should continue to maintain perspective in light of the ongoing banking crisis. While we do not know if there is more collateral damage ahead, we know that company-specific factors and the broader macroeconomic environment led to challenging situations for these particular banks.
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