Skip to main content
opinion
Open this photo in gallery:

A person walks through an entrance at JPMorgan Chase headquarters on Madison Avenue in New York on May 1.Stefan Jeremiah/The Associated Press

On Monday, Jamie Dimon declared the latest U.S. banking crisis is over.

When you run JP Morgan Chase & Co., the largest lender in the land, your words have weight. Let’s assume Mr. Dimon’s call is correct. Let’s agree that JP Morgan’s government-backed rescue of San Francisco-based First Republic Bank on the weekend marks the wrapping up of the final failure in this economic cycle.

That means it’s time to ask what went so wrong, so fast, and what did we learn? And we can look to Mr. Dimon’s conference call with analysts on Monday for answers.

First Republic: A timeline of key events that led to U.S. bank’s failure

First Republic, along with regional lenders Silicon Valley Bank and Signature Bank, failed over the past two months in large part because of bad management. Their executives committed the classic banking sin of mismatching short-term deposits with long-term assets. When those assets – mostly bonds and government-insured mortgages – lost value as interest rates rose, depositors began to pull their savings. That triggered a classic run on the bank.

What Mr. Dimon, rivals and regulators learned in recent weeks is just how fast cash goes out the door, once clients get spooked, and how difficult it is to turn the tide. First Republic and Silicon Valley catered to the most wired customers on the planet: executives in tech, finance, venture capital and private equity. These customers all talk to one another via social media. Their accounts typically held far more than the US$250,000 backstopped by the Federal Deposit Insurance Corp. (FDIC).

In March, after Silicon Valley’s collapse, JP Morgan and 10 other banks tried to limit fallout by collectively depositing US$30-billion at First Republic. Sophisticated clients saw this as a sign of weakness, not strength, and kept heading for the exits. On Monday, Mr. Dimon explained the run was triggered by legions of customers pulling large, uninsured deposits, “money that can move very quickly.”

On the weekend, the U.S. government responded by taking over First Republic and arranging a marriage to JP Morgan that backstops all deposits. That’s the major takeaway from recent weeks: Regulators will use taxpayer money to fix self-inflicted wounds in bank balance sheets, just as they did in the global financial crisis 15 years ago.

The reason Mr. Dimon can confidently state this crisis is over is because depositors now know their money is safe in regional banks, courtesy of the government, even if their balances vastly exceeded the FDIC’s stated limit.

In banking circles, the big question is who does penance for the industry’s past sins. The FDIC estimates First Republic’s failure will cost US$13-billion, paid out of its Depositors Insurance Fund. Add in Silicon Valley and Signature, and the bailout balloons to US$35.5-billion. The FDIC plans to recover a portion of this loss through a one-time levy on surviving banks. There’s already intense lobbying around who pays what.

“Members of Congress have stressed they do not want community banks to be forced to bear any of the special assessment, which could lead to a relatively higher special assessment for the larger banks,” said analyst Gerard Cassidy at RBC Capital Markets in a report. The four large Canadian banks with extensive U.S. operations – Royal Bank, Toronto-Dominion, Canadian Imperial Bank of Commerce, and Bank of Montreal – can expect to share the pain.

On Monday, Mr. Dimon said he expects to see more U.S. bank takeovers as a result of recent turmoil. Such deals would fly in the face of U.S. President Joe Biden’s past opposition to big companies getting bigger in any sector. Mr. Dimon said: “You should ask the bank regulators what their real view is of consolidation.”

And as JP Morgan’s long-serving CEO bid farewell to this financial meltdown – he’s been running the bank since 2006 – he warned where the next crisis is brewing. Down the road, the banks and the economy face significant headwinds if interest rates go “way up” or there is a real estate recession, said Mr. Dimon. “But for now, we should just take a deep breath.”