The latest takeover of First Republic Financial institution, the fourth U.S. financial institution to fail this yr, has woke up issues concerning the attainable repercussions this new failure may need on U.S. and worldwide economies. Whereas United States President Joe Biden has assured the general public that the banking system stays secure, analysts are warning that this won’t be the final financial institution failure on this interval of turmoil.
First Republic Financial institution Collapse Exhibits the Weaknesses of the US Banking System, Say Analysts
The latest collapse of First Republic Financial institution, the second-biggest financial institution failure within the historical past of the U.S., has set off the alarm bells of analysts relating to the attainable repercussions that this may need on the financial system of the nation. Whereas President Joe Biden has assured that the banking system is secure, some consider the fourth financial institution failure in a yr would possibly present that the U.S. banking system has systemic weaknesses.
An nameless funding supervisor at a Beijing financial institution informed International Occasions that this new collapse will doubtless result in extra banks failing in a future liquidity crunch. He said:
The takeover signifies the issue is extra extreme than we first predicted, as we believed the disaster had been eased after the earlier bailout.
Jamie Dimon, CEO of JPMorgan, the financial institution that took over First Republic, declared he believes this “a part of the disaster is over.” Nonetheless, some American analysts suppose in any other case.
Tomasz Piskorski, a professor at Columbia Enterprise College, believes that different banks could possibly be in danger. He declared:
By our calculations near 200 different banks can fail, lots of that are smaller [than First Republic]. The problems aren’t over.
Federal Reserve Blamed
A number of analysts consider that these financial institution failures must do with the hawkish insurance policies of the U.S. Federal Reserve, which has been persistently elevating rates of interest to carry inflation charges right down to 2% since final yr. About this, Piskorski defined:
There’s lots of of banks which have the present market worth of belongings lower than the face worth of debt, and [the crisis] is especially brought on by the rate of interest improve by the Fed.
This would possibly trigger the U.S. authorities to face an unsolvable dilemma, in line with Gao Lingyun, of the Chinese language Academy of Social Sciences in Beijing. The pickle being having to boost rates of interest to decrease inflation charges, however affecting the values of the loans made by the banks when these similar charges have been decrease, rising their dangers of defaulting. This, in flip, would possibly contribute to a future recession and different financial institution failures in additional international locations, Gao warned.
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