Federal Reserve Chair Jerome Powell said Wednesday that the seizure of First Republic and the sale of the bulk of its operations to JPMorgan Chase (JPM) "is an important step toward drawing a line under" the banking stress that started nearly two months ago.
The comments at a press conference following the Fed's announcement of another rate hike were his first since the fall of First Republic, the second-largest bank failure in US history.
The $229 billion San Francisco lender was the third sizable bank to be seized in seven weeks, following Silicon Valley Bank and Signature Bank.
"There were three large banks really from the very beginning that were at heart of the stress we saw in early March," he said. "Those have all now been resolved" and depositors have been protected. The First Republic deal, he added, "is an important step toward drawing a line under that period of severe stress."
When asked whether he was concerned about JPMorgan, the biggest US bank, getting even bigger, Powell said, "I think it's probably good policy that we don't want the largest banks doing big acquisitions... but this is an exception for a failing bank." The purchase was "a good outcome for the banking system."
The comments about First Republic echoed other optimistic statements made this week by big bank CEOs who argued that concerns about the regional banking system should now lessen.
JPMorgan CEO Jamie Dimon said: "This part of the crisis is over." Jane Fraser, CEO of Citigroup (C), on Monday cited "a palpable sense of relief" during an interview with Yahoo Finance and called First Republic "the last remaining main uncertainty of the small handful of banks that did not do a good job with asset liability management."
Wells Fargo (WFC) CEO Charlie Scharf said Tuesday "the majority of the banks that we look at are still extremely strong."
Yet stocks of several regional banks came under pressure following Powell's remarks, including PacWest (PACW) and Western Alliance (WAL) as well as Zions (ZION), Comerica (CMA) and Key (KEY). Many were also down by large percentages on Tuesday.
When he was first asked about the banking turmoil on March 22, Powell singled out Silicon Valley Bank, which went down on March 10, as "an outlier" and said that its management "failed badly." He also downplayed worries about broader problems for the industry, saying "these are not weaknesses that are there at all broadly through the banking system."
Silicon Valley Bank was seized by regulators on March 10 following a massive outflow of deposits that followed a disclosure of bond losses. Banks across the country hold similar bonds that are now worth less as a result of the Fed’s aggressive campaign to bring down inflation.
The massive deposit outflows seen across the industry in March have stabilized in April, according to Fed data. But the larger concern for the industry is the slow drain that is now a year in the making.
Since mid April 2022, banks have lost $960 billion in deposits, or roughly 5.3%, according to Fed data. That is the largest decline since the Fed began collecting the data in 1973.
Another new pressure point is being applied by short sellers who appear to be targeting lenders they perceive to be most vulnerable, driving down the stocks of a number of regional lenders that first came under scrutiny in March.
Powell opened his press conference Wednesday by saying that "conditions in that sector have broadly improved since early March, and the US banking system is sound and resilient."
He also discussed a report the Fed released last week about its oversight of Silicon Valley Bank and possible fixes, saying that he agreed the Fed needed to strengthen supervision and regulations for banks of Silicon Valley Bank's size.
The report spread blame between bank managers who underestimated risks, Fed supervisors who could have done more to press for changes and a set of federal bank regulations that were loosened at the end of last decade.
Fed Vice Chair of Supervision Michael Barr recommended Friday that some of these rules need to change, as a result of the failure. That may include tougher capital and liquidity standards for mid-sized banks, tougher executive compensation standards as well as changes to how the Fed tests for a lender's management of interest-rate risk.
Powell was asked to discuss a February 14 briefing at the Fed that included a description of the interest rate risks piling up at Silicon Valley Bank, and why it didn't prompt more action.
He said the section he saw about Silicon Valley Bank was one page and that it discussed the unrealized losses lurking in the lender's securities portfolio.
"There was nothing in it, that I recall anyway, about the risk of a bank run," he said, and "it wasn’t presented as an urgent or alarming situation."
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