More banks and central banks

It is May, but it feels a bit like March again. US banks are teetering, the Federal Reserve and European Central Bank (ECB) are hiking interest rates, and South Africa is still experiencing loadshedding. The last point should surprise no one, but the first is unsettling.

First Republic Bank never fully recovered from the March banking panic and was seized by US authorities and sold to JPMorgan recently. That made it the third US bank to fail this year, and like the other two, a household name for all the wrong reasons. Like the other two – SVB and Signature – it suffered big losses on its holdings of government bonds as interest rates rose. This would not normally be a train smash if customers did not withdraw deposits en masse. Unfortunately, that is exactly what happened. A combination of higher yields on offer in money market funds and elsewhere and jitters over the safety of banks meant rapid deposit loss. Regulators and bankers are also belatedly discovering that technology is changing the dynamic of the classic bank run. Customers do not physically have to run to the bank. They can do it very quickly electronically. Moreover, rumours of bad bank health can spread much quicker on social media than on the street.

Unfortunately, First Republic’s sale did not reassure investors. Other regional banks have also seen share prices crash, notably PacWest and Western Alliance, even though they do not seem to have faced the same kind of deposit flight. Unlike for other businesses, when a bank’s share price slumps, it almost invariably leads to a sale or closure as it becomes near impossible to raise capital. Even if a bank is not necessarily in financial trouble, a loss of confidence is a death knell. Therefore, when it comes to bank closures, it is unlikely the First Republic will be the last.

Again, there are three important questions to ask: what does this mean for the broader health of the financial system? What is the impact on the real economy? And what is the impact on monetary policy?

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