The Federal Deposit Insurance Corporation just seized First Republic Bank, the 14th<\/sup>\u00a0largest bank in the United States.\u00a0\u00a0First Republic had $104 Billion in deposits.\u00a0\u00a0Some of those were insured by the FDIC (up to $250,000) but the vast majority were not.\u00a0\u00a0If 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.\u00a0\u00a0Like the first domino in a long line, one bank failure could lead to the next.<\/p>\n\n\n\n What was wrong with First Republic?\u00a0\u00a0Like their Northern California fellow failed Silicon Valley Bank, they invested too many of their deposits in \u201cunavailable\u201d assets, like market or government bonds.\u00a0\u00a0Banking hasn\u2019t changed that much over the centuries.\u00a0\u00a0Just like the Bailey Savings and Loan in Jimmy Stewart\u2019s movie \u201cIt\u2019s a Wonderful Life\u201d, people expect to go to the bank and get their money when they want it.\u00a0\u00a0If word gets out that the bank doesn\u2019t have their money \u201con hand\u201d, then more and more depositors demand their savings.\u00a0\u00a0It\u2019s called a run on the bank, and if the bank can\u2019t access funds to cover that \u201crun\u201d, they close.<\/p>\n\n\n\n So it\u2019s not that the money wasn\u2019t \u201cthere\u201d, but it wasn\u2019t available. The First Republic money managers chased profits, and forgot the first rule of banking: cover the deposits.<\/p>\n\n\n\n But if you\u2019re worried about a widespread \u201cbank failure\u201d, relax.\u00a0\u00a0First Republic was seized by the FDIC. It was then sold off to the largest bank in the United States, JP Morgan Chase.\u00a0\u00a0Remember the scene in \u201cIt\u2019s a Wonderful Life\u201d when the mean old Henry Potter offers to \u201csave\u201d the Bailey Savings and Loan, by buying it?\u00a0\u00a0It\u2019s kind of like that:\u00a0\u00a0First Republic was done, and the \u201cinsurance company\u201d, FDIC, sold it off to big old mean Jamie Diamond and Chase Bank.<\/p>\n\n\n\n Of course that\u2019s another problem with American banking. <\/p>\n\n\n\n First Republic had $212 Billion in assets when it folded like a \u201chouse of cards\u201d. For JP Morgan Chase, absorbing it was hardly a gulp. Chase is over fifteen times bigger, valued at over $3.2 Trillion. The other \u201cbig four\u201d 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 <\/strong>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<\/sup> biggest bank in the US).<\/p>\n\n\n\n Chase, Bank of America, Citigroup and Wells Fargo have a \u201cvested\u201d 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 \u201cmake money\u201d, but they also are willing to absorb the \u201cminor\u201d losses of smaller banks to keep the system rolling along. It\u2019s in their best interest, besides the interest of the American economy.<\/p>\n\n\n\n And the FDIC did exactly what they are supposed to do.\u00a0\u00a0They protected the assets of the First Republic depositors without having to pay out from FDIC insurance funds.\u00a0\u00a0Now, instead of First Republic controlling those assets, Jamie Diamond does.\u00a0\u00a0First Republic customers seamlessly become Chase Bank customers.\u00a0\u00a0The FDIC transferred the responsibility rather than \u201ceating\u201d the loss themselves.<\/p>\n\n\n\n But how powerful does that make Jamie Diamond, President of Chase, and the other \u201cBig Four\u201d bankers? Sure, absorbing First Republic was in the best long-term interest of Chase, but how much \u201cpublic faith\u201d is now invested in a few \u201cprivate\u201d 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 \u201cbest thing\u201d for our Nation \u2013 at least, as long as it\u2019s in the best interest of their banks.<\/p>\n\n\n\n In \u201cIt\u2019s a Wonderful Life\u201d, the entire community came together to save the Bailey Savings and Loan. It\u2019s beautiful, and very socialistic (really \u2013 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\u2019t have single banks that could \u201ctank\u201d our entire economy.<\/p>\n\n\n\n And I guess we don\u2019t \u2013 we now have four.\u00a0\u00a0That\u2019s not what was in mind twelve years ago, but it\u2019s exactly where we are now.\u00a0\u00a0And that\u2019s the very definition of power and vulnerability.\u00a0<\/p>\n","protected":false},"excerpt":{"rendered":"Henry Potter<\/h3>\n\n\n\n
Too Big To Fail<\/h3>\n\n\n\n
How Big is Too Big?<\/h3>\n\n\n\n