First Republic Failure Exposes Financial Fragility

Only days after our warning that the US banking system wasn’t out of danger, another major bank failure ensued, as First Republic was seized by regulators and sold to JPMorgan Chase over the weekend after regulators tried to auction the failing bank off to larger competitors. Not even two months after Silicon Valley Bank and Signature Bank failed, First Republic now has become the nation’s second-largest bank failure, as the country’s 14th-largest bank is now no more.

First Republic’s failure is bringing the fragility of the US banking system to the fore once again, as markets now have to realize that the federal government’s intervention to stabilize the banking system did nothing to benefit First Republic. If anything, this latest bank failure has helped to underscore the continuing fragility of the banking system.

Deregulation and Scrutiny

One of the narratives circulating the internet is that the failures of SVB, Signature, and First Republic were the result of banking deregulation. According to that explanation, banks like these were not subject to the same scrutiny that larger banks were, thus allowing them to engage in riskier activities without the oversight that larger “systemically significant” banks were.

On the one hand there’s a bit of truth to that. Under the Dodd-Frank Act, banks that had more than $50 billion in assets were deemed to be systemically significant. In 2018, legislation passed by Congress raised that limit to $250 billion. That allowed smaller banks to grow in size before they faced additional scrutiny.

SVB was one of those banks, growing significantly in the aftermath of that rule change. But just because the bank wasn’t subject to enhanced scrutiny doesn’t mean that the bank wasn’t properly regulated.

In fact, SVB had 31 safety and soundness warnings at the time of its collapse. That shows that neither bank officials nor bank regulators took bank supervision seriously. Bank officials apparently didn’t feel the warnings were serious enough to act on, and regulators didn’t hold the bank’s feet to the fire to ensure that it was in compliance.

With inaction like that, it doesn’t matter what the regulatory regime is like. It’s just plain old failure on the part of both banks and regulators, not the fault of deregulation.

Now the question is, how many other banks are in a similar situation today?

The Big Are Getting Bigger

One of the disconcerting aspects of this incident is the fact that bigger, systemically important banks are getting bigger. The bidding for First Republic’s assets came down to a choice between JPMorgan Chase and PNC, the largest and sixth-largest banks in the US respectively.

As these smaller banks fail, their assets are being bought up either by rivals or by large banks. The rivals thus become bigger than they were, potentially pushing them into the realm of systemic significance, and the already systemically significant such as JPMorgan Chase become even more “too big to fail.”

This concentration within the banking sector isn’t a good thing, as the more concentrated bank deposit assets are, the more risk there is and the more likely it becomes that a single bank failure could result in a systemic crisis. What happens if these banks keep failing and getting absorbed by larger competitors? And what happens if one of those larger banks subsequently fails?

Right now everyone seems to be working under the assumption that the banks that have failed are the victims of a unique set of circumstances that worked against them. The presumption is that bigger banks are better protected against these types of failures due to their broad deposit bases, less exposure to uninsured assets, and more rigorous regulatory oversight and stress testing. But what if that assumption is incorrect?

The fundamental flaw with our fractional reserve banking system is the fact that banks can’t ever pay out 100% of their depositors, and that if enough depositors withdraw or move their money, the bank fails. That’s a fate that can befall any bank at any time.

While we have to trust that federal regulators will make insured bank depositors whole, in the event of a major systemic crisis or a failure of a too big to fail bank, it could be a while before depositors are able to access their money. And even if you are able to get your money, the issue of lost trust is a critical one that can’t always be overcome.

Protecting Your Finances

To say that bank depositors today are nervous is an understatement. The reality that our banking system isn’t as strong as we thought it was has been an eye opener for many Americans. They’re moving their money around in many ways to try to protect it, from switching banks to parking it in money market accounts and even to buying precious metals like gold and silver.

Safety and security of finances is becoming increasingly important to more and more people today, and they’re looking for asset protection anywhere they can find it. With gold and silver having traditionally been seen as safe haven assets, it’s understandable that demand for those precious metals has increased significantly in recent months.

Prices for gold and silver have increased too, although there’s still plenty more room for both gold and silver to rise. And if the banking system continues to show weakness, or if the economy begins to creep closer to recession, don’t be surprised to see gold and silver grow even more.

Whether you have retirement savings you want to move into a gold IRA or money in the bank you want to use to buy gold and silver to store at home, Goldco has precious metals options available for you. With over $1 billion in precious metals placements, Goldco has helped thousands of customers benefit from owning precious metals.

If you’re worried about the future of the financial system and want to safeguard your savings with gold and silver, call Goldco today to learn more about how gold and silver can help you.