FDIC
The Federal Deposit Insurance Corporation just seized First Republic Bank, the 14th largest bank in the United States. First Republic had $104 Billion in deposits. Some of those were insured by the FDIC (up to $250,000) but the vast majority were not. If First Republic went bankrupt, billions of dollars would be at risk. More importantly, it might shake the faith of Americans in the banking system, and shatter the foundation of our financial structure, trust in banks. Like the first domino in a long line, one bank failure could lead to the next.
What was wrong with First Republic? Like their Northern California fellow failed Silicon Valley Bank, they invested too many of their deposits in “unavailable” assets, like market or government bonds. Banking hasn’t changed that much over the centuries. Just like the Bailey Savings and Loan in Jimmy Stewart’s movie “It’s a Wonderful Life”, people expect to go to the bank and get their money when they want it. If word gets out that the bank doesn’t have their money “on hand”, then more and more depositors demand their savings. It’s called a run on the bank, and if the bank can’t access funds to cover that “run”, they close.
Henry Potter
So it’s not that the money wasn’t “there”, but it wasn’t available. The First Republic money managers chased profits, and forgot the first rule of banking: cover the deposits.
But if you’re worried about a widespread “bank failure”, relax. First Republic was seized by the FDIC. It was then sold off to the largest bank in the United States, JP Morgan Chase. Remember the scene in “It’s a Wonderful Life” when the mean old Henry Potter offers to “save” the Bailey Savings and Loan, by buying it? It’s kind of like that: First Republic was done, and the “insurance company”, FDIC, sold it off to big old mean Jamie Diamond and Chase Bank.
Of course that’s another problem with American banking.
Too Big To Fail
First Republic had $212 Billion in assets when it folded like a “house of cards”. For JP Morgan Chase, absorbing it was hardly a gulp. Chase is over fifteen times bigger, valued at over $3.2 Trillion. The other “big four” are Bank of America at $2.41 Trillion, Citigroup with $1.77 Trillion, and Wells Fargo with $1.72 Trillion. Number five, US Bancorp, is far behind at $585.14 Billion. For perspective, my bank, Park National Bank headquartered in Newark, Ohio, has $9.6 Billion in assets. And here in Pataskala, the Pataskala Bank has $40 Million (the 4,457th biggest bank in the US).
Chase, Bank of America, Citigroup and Wells Fargo have a “vested” interest in keeping the American banking system working. Only a systemic failure of the whole structure would dramatically impact them. So they not only work to “make money”, but they also are willing to absorb the “minor” losses of smaller banks to keep the system rolling along. It’s in their best interest, besides the interest of the American economy.
And the FDIC did exactly what they are supposed to do. They protected the assets of the First Republic depositors without having to pay out from FDIC insurance funds. Now, instead of First Republic controlling those assets, Jamie Diamond does. First Republic customers seamlessly become Chase Bank customers. The FDIC transferred the responsibility rather than “eating” the loss themselves.
How Big is Too Big?
But how powerful does that make Jamie Diamond, President of Chase, and the other “Big Four” bankers? Sure, absorbing First Republic was in the best long-term interest of Chase, but how much “public faith” is now invested in a few “private” individuals? Jamie Diamond (Chase), Brian Moynihan (Bank of America), Jane Fraser (Citibank) and Charles Scharf (Wells Fargo) have tremendous sway over the American economy. We (Americans) depend on them to do the “best thing” for our Nation – at least, as long as it’s in the best interest of their banks.
In “It’s a Wonderful Life”, the entire community came together to save the Bailey Savings and Loan. It’s beautiful, and very socialistic (really – I used that word in an essay!!). In the economic crisis of 2008, some of the biggest banks were forced to swallow banks almost their own size (Lehman Brothers). After that, the US determined that we shouldn’t have single banks that could “tank” our entire economy.
And I guess we don’t – we now have four. That’s not what was in mind twelve years ago, but it’s exactly where we are now. And that’s the very definition of power and vulnerability.
