Stocks inched down Monday as investors digested JPMorgan Chase's purchase of most of First Republic Bank's assets.
Shares of JPMorgan Chase rose 2.1% after the bank acquired First Republic and said that the banking system is stable.
Regional bank shares slid. The SPDR S&P 500 Regional Bank exchange-traded fund, which tracks a range of mid-sized banks, fell 2.9%. Shares of PacWest Bancorp slipped 10.6%.
Shares of First Republic Bank remained halted from early Monday morning.
Meanwhile, the latest ISM manufacturing report revealed that manufacturing activity contracted for the sixth straight month in April.
The Federal Reserve begins its two-day monetary policy meeting Tuesday, which is expected to conclude with a quarter-point rate hike. Investors will be watching for clues on how the central bank will proceed with its inflation-fighting plan and whether the recent banking turmoil has altered Fed officials' plans.
Also on deck are earnings reports from Advanced Micro Devices, Starbucks, Ford, Kraft Heinz and more later this week.
The Dow fell 47 points, or 0.1%.
The S&P 500 slipped 0.05%.
The Nasdaq Composite slid 0.1%.
The Federal Deposit Insurance Corporation's fund used to back bank depositors' money is estimated to have a balance of $92.7 billion after the collapse of First Republic Bank. That's the lowest level since 2018.
The FDIC said Monday in a report that it is advocating for an increase in the deposit insurance limit for business payment accounts following the recent collapse of Silicon Valley Bank, Signature Bank and, on Monday, First Republic Bank.
Currently, the FDIC insures up to $250,000 per depositor for each account ownership category. But the agency backed deposits exceeding that limit when SVB and Signature failed, in order to reduce the risk of further bank runs. It also provided temporary unlimited deposit insurance to non-interest bearing accounts in the wake of the Great Recession.
The agency's proposal, outlined in a report it released Monday, did not specify what it thinks would be an appropriate increased level of deposit insurance for business payment accounts.
The FDIC considered two other deposit insurance reforms: raising the insurance cap across all bank accounts, and extending unlimited deposit insurance to all accounts. It found that targeting business accounts for increased insurance was the best option since it has the largest "financial stability benefits relative to its costs."
However, increasing deposit insurance poses a moral hazard since it could lead to banks taking on more risk with their depositors' money without having to worry as much about a bank run.
President Joe Biden said regulatory action taken on First Republican Bank Monday would “make sure that the banking system is safe and sound,” while calling on Congress to hold banks accountable and to raise the debt limit.
Speaking at a small-business event in the Rose Garden Monday, the president began his remarks by saying he was “pleased to say that the regulators have taken action to facilitate the sale of First Republic Bank and ensure that all depositors are protected and the taxpayers are not on the hook.”
“These actions are going to make sure that the banking system is safe and sound,” Biden said, “and that includes protecting small businesses across the country who need to make payroll for workers and their small businesses.”
He added that “all depositors are being protected shareholders are losing their investments, and critically, taxpayers are not the ones that are on the hook.”
Biden said that going forward, he was calling on Congress to “give regulators the tools, hold bank executives accountable,” and that he had called on regulators to “strengthen regulations and supervision of large and regional banks.”
“We have to make sure that we're not back in this position again,” Biden said, “and I think we're well on our way to be able to make that assurance.”
The issues in the banking sector came about because of "a small handful of banks that were poorly managed," Citigroup CEO Jane Fraser told Bloomberg TV in an interview from the Milken Institute Global Conference in Los Angeles.
But, overall, "the US financial system is extremely strong," she told Bloomberg.
Fraser noted the different roles that each size bank plays within the financial system, from global systemically important to smaller, community banks; but said that with around 4,500 banks, there will likely "be more consolidation in the banking sector."
While Citigroup is anticipating a recession "at the back end of the year," Fraser said the strength of the US consumer would mean the economy will recover pretty quickly.
Sherrod Brown, chairman of the US Senate Committee on Banking, Housing, and Urban Affairs, said the collapse of First Republic underscores the need for stronger regulations on large banks.
But for now, First Republic customers should keep banking at their regular branches.
"Customers of First Republic Bank should continue to use their existing branch until they receive notice from JPMorgan Bank, National Association, that it has completed systems changes to allow other JPMorgan Chase Bank, National Association, branches to process their accounts as well," the FDIC said.
First Republic's former customers will experience some changes as a result of the the takeover.
Since they effectively are becoming Chase customers, Chase will notify them if it plans to make any changes to their deposit rates on checking, savings and other accounts such as certificates of deposit.
Other terms of the accounts may also eventually change.
For instance, the FDIC said, "you may withdraw your funds from any transferred account without an early withdrawal penalty until you enter into a new deposit agreement with JP Morgan Chase Bank, N.A. as long as the deposits are not pledged as collateral for loans."
No. Chase is assuming all deposits of First Republic customers. What's more, First Republic customers' deposits will continue to be FDIC-insured.
FDIC insurance covers up to $250,000 per depositor for each account ownership category. That means some customers may be insured for more than $250,000: Each account type is covered separately, so if they had more than one type of deposit account, each one is insured. Also, if more than one person owns an account jointly, each owner is covered up to $250,000.
One quirk to note: If a First Republic customer already has Chase accounts, the transfer of their deposits to Chase will *not* count against their total balances at the bank initially.
First Republic customers will have many of the same banking conveniences that they had before the bank was taken over.
"You may continue to use your checks and ATM/Debit card. Direct deposits like paychecks and Social Security benefits will continue as usual," the FDIC said on its resource page for First Republic customers.
The FDIC notes that anyone with a loan from the bank should continue making payments as usual. There will be no change in the terms of your loan.
Immediately.
All of these banks have either failed or announced their liquidation in just the past two months, making investors and everyday customers uneasy.
But bankers and regulators agree: Despite the scary headlines, the system is, overall, sound.
"No crystal ball is perfect, but yes, I think the banking system is very stable," said Jamie Dimon said on an investor call Monday, shortly after his bank, JPMorgan Chase, agreed to buy most of First Republic’s assets. “This part of the crisis is over."
The reason it’s all happening now has to do with the Federal Reserve’s yearlong rate-hiking campaign to fight inflation. Interest rates are a blunt tool that often take months or years to show their effect, and it's often hard to tell where the impact will be hardest.
In the case of banks, higher rates eroded the value of their investment portfolios and put a damper on the industries, such as tech, that they did business with.
In each bank's case, a combination of factors — including management missteps and macroeconomic factors — collided to bring down the business.
No one knows what exactly comes next. But investors, consumers and the market at large are hoping Dimon is right about this chapter of the crisis coming to an end.
First Republic Bank is poised to get kicked out of the broad-based S&P 500.
The bank's market capitalization fell about $22 billion to $653.6 million after a mass outflow of deposits during the first quarter triggered a steep sell-off of its stock, and eventually First Republic Bank's collapse and purchase of its assets by JPMorgan Chase.
The S&P 500 requires companies to have a total market cap of at least $12.7 billion.
Silicon Valley Bank, which collapsed last month, was replaced in the S&P 500 by medical device firm Insulet just days after the bank's failure.
Signature Bank was replaced by soybean exporter Bunge Limited that same day.