Two bank failures like the United States experienced in the earlier months of 2023 aren’t historically as much of a problem when the dollar amounts they represent are more manageable.
Not even three bank failures, as we have by May 2023, have been as much of an issue as we have now.
The size of Silicon Valley Bank, the first bank to fall in this collapse, was already making it very difficult for regulators to find a buyer to most easily correct the situation, and now we have an even bigger problem with more problems on the horizon.
In 2019, then FDIC Chairman Martin Gruenberg told a Brookings audience that there aren’t many financial institutions large enough to acquire a big regional bank with more than $50 billion in assets. That has been the waterline and we are far past that in our current Bank Collapse.
Signature Bank and Silicon Valley Bank, have combined total assets of $319.36 billion.
Looking back, 2008 saw the peak in terms of asset size for bank failures which were $373.6 billion over 25 banks, while 2010 saw the peak in the number of banks failing at 157 banks.
As reported by Zerohedge, So far in 2023, 3 banks have failed with combined assets of $548.5 billion.
So this is a different problem than we have had before.
According to Axios, even including the $170.9 billion in assets from failed banks in 2009, 2023 is still worse than the two ‘great financial crisis’ years combined.
Unfortunately, the banking collapse of 2023 is far from over, according to Michael Bostock who reported on a new and serious problem added into the mix, commercial real estate:
“We still have eight more months to go before this year is done, and many more banks are currently teetering on the brink of disaster. Executives at those banks are telling us not to worry, but of course executives at First Republic were issuing similar assurances just last week. Personally, I had heard that First Republic supposedly had enough reserves to keep going for months. But that was a lie, and now First Republic is toast. The following comes from the official statement that the FDIC issued when it took over the bank….” adding:
“First Republic Bank, San Francisco, California, was closed today by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect depositors, the FDIC is entering into a purchase and assumption agreement with JPMorgan Chase Bank, National Association, Columbus, Ohio, to assume all of the deposits and substantially all of the assets of First Republic Bank.”
Bostock goes on to talk about the process of recovery for First Republic, who got trashed, who benefitted, and what he believes is going to happen going forward that will make it all worse:
JPMorgan Chase Bank, National Association submitted a bid for all of First Republic Bank’s deposits. As part of the transaction, First Republic Bank’s 84 offices in eight states will reopen as branches of JPMorgan Chase Bank, National Association, today during normal business hours. All depositors of First Republic Bank will become depositors of JPMorgan Chase Bank, National Association, and will have full access to all of their deposits.
The government was not going to allow just anyone to snap up the assets of First Republic.
JPMorgan Chase was one of the institutions that was invited to make a bid, and they came out of this process as the big winners…
JPMorgan is getting about $92 billion in deposits in the deal, which includes the $30 billion that it and other large banks put into First Republic last month. The bank is taking on $173 billion in loans and $30 billion in securities as well.
Bostock went on:
The Federal Deposit Insurance Corporation agreed to absorb most of the losses on mortgages and commercial loans that JPMorgan is getting, and also provided it with a $50 billion credit line.
In addition to providing JPMorgan Chase with a 50 billion dollar credit line, the FDIC will also take a loss on this deal of approximately 13 billion dollars. So they are definitely one of the big losers in this deal…
The FDIC estimates that the cost to the Deposit Insurance Fund will be about $13 billion. This is an estimate and the final cost will be determined when the FDIC terminates the receivership.
Needless to say, the biggest losers of all are the shareholders of First Republic.
They got completely wiped out…
“Stockholders got bailed in and wiped out. They’d already been mostly wiped out by Friday evening in one of the most spectacular stock plunges ever.
Bostock reported that he isn’t buying talk of the crisis being over:
“The banking system remains sound and resilient, and Americans should feel confident in the safety of their deposits and the ability of the banking system to fulfill its essential function of providing credit to businesses and families,’ a Treasury spokesperson said.
“Does reading that make you feel better?
They always offer such platitudes before things start getting really bad.”
And here is his reasoning for being dubious:
And as Charlie Munger recently observed, many of our banks are absolutely packed with “bad loans” right now…
Charlie Munger believes there is trouble ahead for the U.S. commercial property market.
The 99-year-old investor told the Financial Times that U.S. banks are packed with “bad loans” that will be vulnerable as “bad times come” and property prices fall.
He is quite correct,” Bostock wrote, adding:
In particular, the collapse of commercial real estate prices threatens to create a massive tsunami of defaults…
Berkshire Hathaway, where Munger serves as vice chairman, has largely stayed on the fringe of the crisis despite its history of supporting American banks through times of turmoil. Munger, who is also Warren Buffett’s longtime investment partner, suggested that Berkshire’s restraint is partially due to risks that could emerge from banks’ numerous commercial property loans.
“A lot of real estate isn’t so good anymore,” Munger said. “We have a lot of troubled office buildings, a lot of troubled shopping centers, a lot of troubled other properties. There’s a lot of agony out there.
The “too big to fail” banks will scoop up those that they like, while others are simply liquidated and go out of existence.
Ultimately, I believe that we are going to see a wave of consolidation in the banking industry like we never have before,” Bostock wrote, adding another layer to the growing concerns we are seeing all over our nation.