First Republic Bank - a regional issue

  • Stephen Mann
  • 03 May 2023
  • 5 mins reading time

The weekend produced yet more bank collapse headlines. This time it was US bank First Republic, which saw its share price plummet and was bought out by US banking giant JP Morgan.

It’s been less than two months since the shock collapses of Silicon Valley Bank (SVB), Signature Bank and Credit Suisse. Does this latest failure mean we are seeing a global banking crisis trend rather than isolated incidents?

Here are 3 reasons why we think not.

1. Markets react to shocks

It is true that the collapses of SVB and Credit Suisse in March 2023 sent shockwaves through financial markets and caused shares in general, and particularly banking sector shares, to dip. But this is the ‘normal’ function of financial markets; shock events often cause wobbles in share prices.

Investors tend to react instantly to negative news stories. This is often a knee-jerk emotional response, and does not mean that investors have performed a detailed analysis of the fundamental health of the global banking system!

2. A regional issue

Swiss bank Credit Suisse is an outlier here. The bank had struggled with various issues and scandals over many years that had damaged its reputation and share price. So the recent collapse was not a shock for those analysts that research the fundamentals of the banking sector, and certainly not an indicator for the health of the European banking sector as a whole.

However, we feel the US is different. There are some issues within the regional US small to mid-sized banking sector. After the Global Financial Crisis (GFC) of 2008, many banking regulators around the world put extra provisions in place to avoid a repeat of the crisis. In recent years, some of these extra provisions were removed or watered down for US small and mid-sized banks. This included the reforming of the 2010 Dodd-Frank Act, which had established stronger rules for banking ‘stress tests’ (tests to ensure that banks have the ability to stay solvent in various scenarios). The US also decided that banks with less than $250 billion of assets no longer needed to comply. Similarly, the ‘Volker Rule’, which ringfenced consumer deposits away from the other, potentially more risky, trading activities, was watered down for smaller US banks.

3. Evidence of UK banking strength

The watering down of post-GFC tighter regulation has not necessarily happened in many other economies, including the UK. Whilst UK regulators have been trying to establish ways to help smaller banks to become more competitive with the big household consumer banks, they have not gone as far as to loosen any of the strict rules that were implemented post-GFC. The company reporting season for UK banks has got underway, and so far, it is showing significant strength for UK banks.

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