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Powell Bets the Fed Can Slow Inflation Despite Recession Fears

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Jerome H. Powell, the Federal Reserve chair, thinks his central bank can defy history to clinch slower inflation and a soft economic landing.The Federal Reserve’s push to slow the economy and bring inflation under control is often compared to an airplane descent, one that could end in a soft landing, a bumpy one or an outright crash.Jerome H. Powell, the Fed chair, is betting on something more akin to the Miracle on the Hudson: a touchdown that is gentle, all things considered, and unlike anything the nation has seen before.The Fed has raised rates sharply over the past year, pushing them just above 5 percent on Wednesday, in a bid to cool the economy to bring inflation under control. Staff economists at the central bank have begun to forecast that America is likely to tip into a recession later this year as the Fed’s substantial policy moves combine with turmoil in the banking sector to snuff out growth.But Mr. Powell made it clear during a news conference on Wednesday that he does not agree.“That’s not my own most likely case,” he said, explaining that he expects modest growth this year. That sunnier forecast has hinged, in part, on trends in the labor market.America’s job market is still very strong — with rapid job growth and unemployment hovering near a 50-year low — but it has shown signs of cooling. Job openings have dropped sharply in recent months, falling to 9.6 million in March from a peak of more than 12 million a year earlier. Historically, such a massive decline in the number of available positions would have come alongside layoffs and rising joblessness, and prominent economists had predicted a painful economic landing for exactly that reason.But so far, unemployment has not budged.Relationship Status: It’s ComplicatedJoblessness usually increases when job openings fall. But that relationship is in question now as job openings drop while unemployment remains low.

Note: Data is seasonally adjustedSource: Bureau of Labor StatisticsBy The New York Times“It wasn’t supposed to be possible for job openings to decline by as much as they have declined without unemployment going up,” Mr. Powell said this week. While America will get the latest update on unemployment when a job market report is released Friday, unemployment has yet to rise meaningfully. Mr. Powell added that “there are no promises in this, but it just seems to me that it is possible that we can continue to have a cooling in the labor market without having the big increases in unemployment that have gone with many prior episodes.”America’s economic fate rests on whether Mr. Powell’s optimism is correct. If the Fed can pull it off — defying history to wrangle rapid inflation by sharply cooling the labor market without causing a big and painful jump in joblessness — the legacy of the post-pandemic economy could be a tumultuous but ultimately positive one. If it can’t, taming price increases could come at a painful cost to America’s employees.The Fed has raised rates sharply over the past year, pushing them just above 5 percent as of their meeting this week, in a bid to cool the economy in order to wrestle inflation under control.Hiroko Masuike/The New York TimesSome economists are skeptical that the good times can last.“We haven’t seen this trade-off, which is fantastic,” said Aysegul Sahin, an economist at the University of Texas at Austin. But she noted that productivity data appeared glum, which suggests that companies got burned by years of pandemic labor shortages and are now hanging onto workers even when they do not necessarily need them to produce goods and services.“This time was different, but now we are getting back to the state where it is a more normal labor market,” she said. “This is going to start playing out the way it always plays out.”The Fed is in charge of fostering both maximum employment and stable inflation. But those goals can come into conflict, as is the case now.Inflation has been running above the Fed’s 2 percent goal for two full years. While the strong labor market did not initially cause the price spikes, it could help to perpetuate them. Employers are paying higher wages to try to hang onto workers. As they do that, they are raising prices to cover their costs. Workers who are earning a bit more are able to afford rising rents, child care costs and restaurant checks without pulling back.In situations like this, the Fed raises interest rates to cool the economy and job market. Higher borrowing costs slow down the housing market, discourage big consumer purchases like cars and home improvement projects, and deter businesses from expanding. As people spend less, companies cannot keep raising prices without losing customers.But setting policy correctly is an economic tightrope act.Policymakers think that it is paramount to act decisively enough to quickly bring inflation under control — if it is allowed to persist too long, families and businesses could come to expect steadily rising prices. They might then adjust their behavior, asking for bigger raises and normalizing regular price increases. That would make inflation even harder to stamp out.On the other hand, officials do not want to cool the economy too much, causing a painful recession that proves more punishing than was necessary to return inflation to normal.Striking that balance is a dicey proposition. It is not clear exactly how much the economy needs to slow to fully control inflation. And the Fed’s interest rate policy is blunt, imprecise and takes time to work: It is hard to guess how much the increases so far will ultimately weigh on growth.That is why the Fed has slowed its policy changes in recent months — and why it appears poised to pause them altogether. After a string of three-quarter point rate moves last year, the Fed has recently adjusted borrowing costs a quarter point at a time. Officials signaled this week that they could stop raising rates altogether as soon as their mid-June meeting, depending on incoming economic data.Hitting pause would give central bankers a chance to see whether their rate adjustments so far might be sufficient.It would also give them time to assess the fallout from turmoil in the banking industry — upheaval that could make a soft economic landing even more difficult.Three large banks have collapsed and required government intervention since mid-March, and jitters continue to course through midsize lenders, with several regional bank stocks plummeting on Wednesday and Thursday. Banking troubles can quickly translate into economic problems as lenders pull back, leaving businesses less able to grow and families less able to finance their consumption.The labor market could be in for a more dramatic slowdown, given the bank tumult and the Fed’s rate moves so far, said Nick Bunker, the director of North American economic research at the job site Indeed.He said that while job openings have been coming down swiftly, some of that might reflect a shift back to normal conditions after a bout of pandemic-inspired weirdness, not necessarily as a result of Fed policy.For instance, job openings in leisure and hospitality industries had spiked as restaurants and hotels reopened from lockdowns. Those were now disappearing, but that might be more about a return to business as usual.“A soft landing is happening, but how much of that is gravity and how much of it is what the pilot is doing with the plane?” Mr. Bunker said. Going forward, it could be that the normal historical relationship between declining job openings and rising joblessness will kick in as policy begins to bite.Or this time truly could be unique — as Mr. Powell is hoping. But whether the Fed and the American economy get to test his thesis could depend on whether the banking system issues clear up, Mr. Bunker said.“We might not get the answer if the financial sector comes and tips the table over,” he said. More

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    Fed Will Decide Next Rate Move After Bank Jitters

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    The Federal Reserve will release a policy decision on Wednesday on the heels of another bank collapse.WASHINGTON — Federal Reserve officials are widely expected to lift borrowing costs by a quarter of a percentage point on Wednesday, the 10th consecutive rate increase since March 2022. But investors and economists think that this could be the central bank’s last move before it pauses.Fed officials face a complicated backdrop going into this week’s meeting: Risks to the financial system loom large, but inflation also remains stubborn.The banking system has been in turmoil since the collapse of Silicon Valley Bank on March 10. Government officials spent this past weekend racing to find a buyer for First Republic, which had been struggling for weeks and was sold to JPMorgan Chase in a deal announced early Monday morning.Some of the banking sector tumult stems from the Fed’s rapid interest rate increases over the past year. Central bankers are expected to lift rates to just above 5 percent this week, up from near-zero as recently as March 2022. After that quick series of adjustments, many lenders are facing losses on older securities and loans, which pay relatively low interest rates compared with newer securities issued in a higher-rate world.Despite the Fed’s moves — which were meant to rein in quick inflation by slowing the economy — the job market has maintained some momentum and price increases have shown concerning staying power. Companies continue to hire at a solid clip, and data released last week showed that wages continued to climb quickly at the start of the year. While inflation has been slowing, it is increasingly driven by service price increases that have shown little sign of cooling off — which could make it difficult to wrestle price increases the whole way back to the Fed’s slow and steady goal.Policymakers will give the public a sense of how they are thinking about the fraught economic moment on Wednesday in their post-meeting statement at 2 p.m. Because the Fed will not release fresh economic projections at this meeting — those come out just once a quarter — investors will look to a news conference with the Fed chair, Jerome H. Powell, at 2:30 p.m. for clues about what comes next.The Fed could hint at a pauseWhen Fed policymakers released their economic estimates in March, they expected to raise interest rates to a range of 5 to 5.25 percent in 2023.If officials adjust policy as expected this week, they will have lifted rates to that level. The question now is whether they deem that sufficient, or whether policymakers think that the economy and inflation are resilient enough that they will need to adjust borrowing costs more to cool things down and lower inflation fully.Mr. Powell could offer some signal during his news conference, or he could opt to leave the Fed’s options open — which is what some economists expect.“They don’t need to rule anything out,” said Blerina Uruci, chief U.S. economist at T. Rowe Price. “The worst scenario for them would be to signal that they’re done, then have the data force them to do a U-turn.”Investors expect Fed officials to stop after this week, hold rates steady for a few months and then begin to lower them — perhaps substantially, to a range of 4.5 to 4.75 percent by the end of the year.Fed policymakers, however, have been adamant that they do not expect to lower rates imminently. And some have hinted that more increases might be warranted if inflation and economic strength show staying power.“Monetary policy needs to be tightened further,” Christopher Waller, a Fed governor and one of the central bank’s more inflation-focused members, said in an April 14 speech. “How much further will depend on incoming data on inflation, the real economy and the extent of tightening credit conditions.”Bank turmoil will influence policyFed officials have been clear that the upheaval in the banking system could slow the economy — but policymakers do not know by how much.Banking trouble is different from other types of business distress, because banks are like the yeast in the sourdough starter of the economy: If they aren’t working, nothing else grows. They lend out money to would-be home buyers, people who want to buy new cars or garage additions, and businesses that want to expand and hire.It is pretty clear that banks are going to pull back their lending at least somewhat in response to the recent turmoil. Anecdotal signs are already surfacing around the country. The question is how acute that shift will be.“If the response to recent banking problems leads to financial tightening, monetary policy has to do less,” Austan Goolsbee, the president of the Federal Reserve Bank of Chicago, said in an April 11 speech. “It’s not clear by how much less.”He noted that private-sector estimates suggested that the hit to growth from the banking turmoil could be equivalent to one to three quarter-point rate increases. That estimate came well before First Republic’s demise, but after its troubles started.The economy’s resilience will be criticalOne big question for the Fed — and which will matter for everyone — is whether the U.S. economy will squeak through this episode without plunging into a painful recession.Fed staff members said at the central bank’s March meeting that they expected the economy to experience a “mild recession” in the wake of the recent banking turmoil. And Fed officials — including Mr. Powell — have suggested that a recession is possible as officials try to slow the economy enough to bring inflation under control.But if a recession hits, it is not obvious how painful it will be. Some economists warn that downturns usually build on themselves, as people respond to a little bit of economic weakness by pulling back on spending a lot: It may be hard to push the unemployment rate up just a little bit without pushing it significantly.Others point out that the post-pandemic economy is a weird one, characterized by unusually strong corporate profits and lots of job openings. Because there may be room to squeeze margins and cut unfilled positions, the economy may be able to cool down more gently than in the past — a so-called “soft landing.”Mr. Powell will get a chance to weigh in on which outcome he thinks is most likely on Wednesday. More

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    Late-Night Negotiating Frenzy Left First Republic in JPMorgan’s Control

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    The resolution of First Republic Bank came after a frantic night of deal making by government officials and executives at the country’s biggest bank.Lawmakers and regulators have spent years erecting laws and rules meant to limit the power and size of the largest U.S. banks. But those efforts were cast aside in a frantic late-night effort by government officials to contain a banking crisis by seizing and selling First Republic Bank to the country’s biggest bank, JPMorgan Chase.At about 1 a.m. Monday, hours after the Federal Deposit Insurance Corporation had been expected to announce a buyer for the troubled regional lender, government officials informed JPMorgan executives that they had won the right to take over First Republic and the accounts of its well-heeled customers, most of them in wealthy coastal cities and suburbs.The F.D.I.C.’s decision appears, for now, to have quelled nearly two months of simmering turmoil in the banking sector that followed the sudden collapse of Silicon Valley Bank and Signature Bank in early March. “This part of the crisis is over,” Jamie Dimon, JPMorgan’s chief executive, told analysts on Monday in a conference call to discuss the acquisition.For Mr. Dimon, it was a reprise of his role in the 2008 financial crisis when JPMorgan acquired Bear Stearns and Washington Mutual at the behest of federal regulators.But the resolution of First Republic has also brought to the fore long-running debates about whether some banks have become too big too fail partly because regulators have allowed or even encouraged them to acquire smaller financial institutions, especially during crises.“Regulators view them as adults and business partners,” said Tyler Gellasch, president of Healthy Markets Association, a Washington-based group that advocates greater transparency in the financial system, referring to big banks like JPMorgan. “They are too big to fail and they are afforded the privilege of being so.”He added that JPMorgan was likely to make a lot of money from the acquisition. JPMorgan said on Monday that it expected the deal to raise its profits this year by $500 million.JPMorgan will pay the F.D.I.C. $10.6 billion to acquire First Republic. The government agency expects to cover a loss of about $13 billion on First Republic’s assets.`Normally a bank cannot acquire another bank if doing so would allow it to control more than 10 percent of the nation’s bank deposits — a threshold JPMorgan had already reached before buying First Republic. But the law includes an exception for the acquisition of a failing bank.The F.D.I.C. sounded out banks to see if they would be willing to take First Republic’s uninsured deposits and if their primary regulator would allow them to do so, according to two people familiar with the process. On Friday afternoon, the regulator invited the banks into a virtual data room to look at First Republic’s financials, the two people said. The government agency, which was working with the investment bank Guggenheim Securities, had plenty of time to prepare for the auction. First Republic had been struggling since the failure of Silicon Valley Bank, despite receiving a $30 billion lifeline in March from 11 of the country’s largest banks, an effort led by Mr. Dimon of JPMorgan.By the afternoon of April 24, it had became increasingly clear that First Republic couldn’t stand on its own. That day, the bank revealed in its quarterly earnings report that it had lost $102 billion in customer deposits in the last weeks of March, or more than half what it had at the end of December.Ahead of the earnings release, First Republic’s lawyers and other advisers told the bank’s senior executives not to answer any questions on the company’s conference call, according to a person briefed on the matter, because of the bank’s dire situation.The revelations in the report and the executives’ silence spooked investors, who dumped its already beaten-down stock.When the F.D.I.C. began the process to sell First Republic, several bidders including PNC Financial Services, Fifth Third Bancorp, Citizens Financial Group and JPMorgan expressed an interest. Analysts and executives at those banks began going through First Republic’s data to figure out how much they would be willing to bid and submitted bids by early afternoon Sunday.Regulators and Guggenheim then returned to the four bidders, asking them for their best and final offers by 7 p.m. E.T. Each bank, including JPMorgan Chase, improved its offer, two of the people said.Regulators had indicated that they planned to announce a winner by 8 p.m., before markets in Asia opened. PNC executives had spent much of the weekend at the bank’s Pittsburgh headquarters putting together its bid. Executives at Citizens, which is based in Providence, R.I., gathered in offices in Connecticut and Massachusetts. But 8 p.m. rolled by with no word from the F.D.I.C. Several hours of silence followed.For the three smaller banks, the deal would have been transformative, giving them a much bigger presence in wealthy places like the San Francisco Bay Area and New York City. PNC, which is the sixth-largest U.S. bank, would have bolstered its position to challenge the nation’s four large commercial lenders — JPMorgan, Bank of America, Citigroup and Wells Fargo.Ultimately, JPMorgan not only offered more money than others and agreed to buy the vast majority of the bank, two people familiar with the process said. Regulators also were more inclined to accept the bank’s offer because JPMorgan was likely to have an easier time integrating First Republic’s branches into its business and managing the smaller bank’s loans and mortgages either by holding onto them or selling them, the two people said.As the executives at the smaller banks waited for their phones to ring, the F.D.I.C. and its advisers continued to negotiate with Mr. Dimon and his team, who were seeking assurances that the government would safeguard JPMorgan against losses, according to one of the people.At around 3 a.m., the F.D.I.C. announced that JPMorgan would acquire First Republic.An F.D.I.C. spokesman declined to comment on other bidders. In its statement, the agency said, “The resolution of First Republic Bank involved a highly competitive bidding process and resulted in a transaction consistent with the least-cost requirements of the Federal Deposit Insurance Act.” The announcement was widely praised in the financial industry. Robin Vince, the president and chief executive of Bank of New York Mellon, said in an interview that it felt “like a cloud has been lifted.”Some financial analysts cautioned that the celebrations might be overdone.Many banks still have hundreds of billions of dollars in unrealized losses on Treasury bonds and mortgage-backed securities purchased when interest rates were very low. Some of those bond investments are now worth much less because the Federal Reserve has sharply raised rates to bring down inflation.Christopher Whalen of Whalen Global Advisors said the Fed fueled some of the problems at banks like First Republic with an easy money policy that led them to load up on bonds that are now performing poorly. “This problem will not go away until the Fed drops interest rates,” he said. “Otherwise, we’ll see more banks fail.”But Mr. Whalen’s view is a minority opinion. The growing consensus is that the failures of Silicon Valley, Signature and now First Republic will not lead to a repeat of the 2008 financial crisis that brought down Bear Stearns, Lehman Brothers and Washington Mutual.The assets of the three banks that failed this year are greater than of the 25 banks that failed in 2008 after adjusting for inflation. But 465 banks failed in total from 2008 to 2012.One unresolved issue is how to deal with banks that still have a high percentage of uninsured deposits — money from customers well in excess of the $250,000 federally insured cap on deposits. The F.D.I.C. on Monday recommended that Congress consider expanding its ability to protect deposits.Many investors and depositors are already assuming that the government will step in to protect all deposits at any failing institution by invoking a systemic risk exception — something they did with Silicon Valley Bank and Signature Bank. But that’s easy to do when it is just a few banks that run into trouble and more difficult if many banks have problems.Another looming concern is that midsize banks will pull back on lending to preserve capital if they are subject to the kind of bank runs that took place at Silicon Valley Bank and First Republic. Depositors might also move their savings to money market funds, which tend to offer higher returns than savings or checking accounts.Midsize banks also need to brace for more exacting oversight from the Fed and the F.D.I.C., which criticized themselves in reports released last week about the bank failures in March.Regional and community banks are the main source of financing for the commercial real estate industry, which encompasses office buildings, apartment complexes and shopping centers. An unwillingness by banks to lend to developers could stymie plans for new construction.Any pullback in lending could lead to a slowdown in economic growth or a recession.Some experts said that despite those challenges and concerns about big banks getting bigger, regulators have done an admirable job in restoring stability to the financial system.“It was an extremely difficult situation, and given how difficult it was, I think it was well done,” said Sheila Bair, who was chair of the F.D.I.C. during the 2008 financial crisis. “It means that big banks becoming bigger when smaller banks begin to fail is inevitable,” she added.Reporting was contributed by More

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    A Timeline of How the Banking Crisis Has Unfolded

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    First Republic’s downfall was just the latest in a series of problems affecting midsize banks.First Republic Bank was seized by regulators and sold to JPMorgan Chase on Monday, the latest casualty of a banking crisis that has seen other troubled lenders collapse in March.Silicon Valley Bank, one of the most prominent lenders to technology start-ups and venture capital firms, was the first to implode on March 10. Regulators seized Silicon Valley Bank, and later, Signature Bank, a New York financial institution with a large real estate lending business. The panic also led to Wall Street’s biggest banks stepping in to give $30 billion to First Republic and UBS’s takeover of its rival, the Swiss bank Credit Suisse.As investors and bank customers have fretted over the stability of the financial system, federal officials have tried to ease concerns, taking steps to protect depositors and reassuring them they could access all their money.Here is a timeline of events related to the global financial turmoil.March 8In a letter to stakeholders, Silicon Valley Bank said it needed to shore up its finances, announcing a roughly $1.8 billion loss and a plan to raise $2.25 billion in capital to handle increasing withdrawal requests amid a dim economic environment for tech companies.Moody’s, a credit ratings firm, downgraded the bank’s bonds rating.Silvergate, a California-based bank that made loans to cryptocurrency companies, separately announced that it would cease operations and liquidate its assets after suffering heavy losses.March 9Gregory Becker, the chief executive of Silicon Valley Bank, urged venture capital firms to remain calm on a conference call. But panic spread on social media and some investors advised companies to move their money away from the bank.A Silicon Valley Bank executive wrote in a note to clients that it had “been a tough day” but the bank was “actually quite sound, and it’s disappointing to see so many smart investors tweet otherwise.”The bank’s stock plummeted 60 percent and clients pulled out about $40 billion of their money.March 10In the biggest bank failure since the 2008 financial crisis, Silicon Valley Bank collapsed after a run on deposits. The Federal Deposit Insurance Corporation announced that it would take over the 40-year-old institution.Investors began to dump stocks of the bank’s peers, including First Republic, Signature Bank and Western Alliance, which had similar investment portfolios. The nation’s largest banks were more insulated from the fallout, with shares of JPMorgan, Wells Fargo and Citigroup generally flat.Treasury Secretary Janet L. Yellen reassured investors that the banking system was resilient, expressing “full confidence in banking regulators.”Signature Bank, a 24-year-old institution that provided lending services for real estate companies and law firms, saw a torrent of deposits leaving its coffers after customers began panicking.March 12New York regulators shut down Signature Bank, just two days after Silicon Valley Bank failed, over concerns that keeping the bank open could threaten the stability of the financial system. Signature was one of the few banks that had recently opened its doors to cryptocurrency deposits.The Federal Reserve, the Treasury Department and the F.D.I.C. announced that “depositors will have access to all of their money” and that no losses from either bank’s failure would be “borne by the taxpayer.”The Fed said it would set up an emergency lending program, with approval from the Treasury, to provide additional funding to eligible banks and help ensure they could “meet the needs of all their depositors.”March 13President Biden said in a speech that the U.S. banking system was safe and insisted that taxpayers would not pay for any bailouts in an attempt to ward off a crisis of confidence in the financial system.Regional bank stocks plunged after the unexpected seizure of Silicon Valley Bank and Signature Bank, with shares of First Republic tumbling 60 percent.The Bank of England announced that banking giant HSBC would buy Silicon Valley Bank’s British subsidiary.March 14Bank stocks recouped some of their losses as investor fears began to ease.The Justice Department and the Securities and Exchange Commission reportedly opened investigations into Silicon Valley Bank’s collapse.March 15Credit Suisse shares tumbled after investors started to fear that the bank would run out of money. Officials at Switzerland’s central bank said it would step in and provide support to Credit Suisse if necessary.March 16Eleven of the largest U.S. banks came together to inject $30 billion into First Republic, which was teetering on the brink of collapse. The plan was hatched by Ms. Yellen and Jamie Dimon, the chief executive of JPMorgan Chase. The Treasury secretary believed the actions by the private sector would help underscore confidence in the stability of the banking system. Shares of the bank rallied on the announcement.Credit Suisse said it planned to borrow as much as $54 billion from the Swiss National Bank to stave off concerns about its financial health.Ms. Yellen testified before the Senate Finance Committee and sought to reassure the public that U.S. banks were “sound” and deposits were safe.March 17The shares of many banks continued to slide, wiping out the previous day’s gains as investors continued to worry about the financial turmoil.One day after the $30 billion lifeline was announced, First Republic’s stock plummeted again and it was in talks to sell a piece of itself to other banks or private equity firms.March 19UBS, Switzerland’s largest bank, agreed to buy its smaller rival, Credit Suisse, for about $3.2 billion. The Swiss National Bank agreed to lend up to 100 billion Swiss francs to UBS to help close the deal. The Swiss financial regulatory agency also wiped out $17 billion worth of Credit Suisse’s bonds and eliminated the need for UBS shareholders to vote on the deal.The Fed and five other global central banks took steps to ensure that dollars would remain readily available in a move intended to ease pressure on the global financial system.The F.D.I.C. said it had entered into an agreement to sell the 40 former branches of Signature Bank to New York Community Bancorp.March 26First Citizens BancShares agreed to acquire Silicon Valley Bank in a government-backed deal that included the purchase of about $72 billion in loans at a discount of $16.5 billion. It also included the transfer of all the bank’s deposits, which were worth $56 billion. About $90 billion in the bank’s securities and other assets were not included in the sale and remained in the F.D.I.C.’s control.March 30Mr. Biden called on financial regulators to strengthen oversight of midsize banks that faced reduced scrutiny after the Trump administration weakened some regulations. The president proposed requiring banks to protect themselves against potential losses and maintain enough access to cash so they could better endure a crisis, among other things.March 28While testifying before Congress, officials at the Fed, the F.D.I.C. and the Treasury Department faced tough questions from lawmakers about the factors that led to the failures of Silicon Valley Bank and Signature Bank.Michael S. Barr, the Fed’s vice chair for supervision, blamed bank executives and said the Fed was examining what went wrong, but provided little explanation as to why supervisors did not prevent the collapse.April 14The country’s largest banks — including JPMorgan Chase, Citigroup and Wells Fargo — reported robust first-quarter earnings, signaling that many customers had developed a strong preference for larger institutions they viewed as safer.April 24First Republic’s latest earnings report showed that the bank lost $102 billion in customer deposits during the first quarter — well over half the $176 billion it held at the end of last year — not including the temporary $30 billion lifeline. The bank said it would cut up to a quarter of its work force and reduce executive compensation by an unspecified amount.In a conference call with Wall Street analysts, the bank’s executives said little and declined to take questions.The bank’s stock dropped about 20 percent in extended trading after rising more than 10 percent before the report’s release.April 25First Republic’s stock closed down 50 percent after the troubling earnings report.April 26First Republic’s stock continued its tumble, dropping about 30 percent and closing the day at just $5.69, a decline from about $150 a year earlier.April 28The Fed released a report faulting itself for failing to “take forceful enough action” ahead of Silicon Valley Bank’s collapse. The F.D.I.C. released a separate report that criticized Signature Bank’s “poor management” and insufficient risk policing practices.May 1First Republic was taken over by the F.D.I.C. and immediately sold to JPMorgan Chase, making it the second biggest U.S. bank by assets to collapse after Washington Mutual in 2008. More

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    First Republic Lurches as It Struggles to Find a Savior

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    The bank is sitting on big losses and paying more to borrow money than it is making on its loans to homeowners and businesses.First Republic Bank is sliding dangerously into a financial maelstrom, one from which an exit appears increasingly difficult.Hardly a household name until a few weeks ago, First Republic is now a top concern for investors and bankers on Wall Street and officials in Washington. The likeliest outcome for the bank, people close to the situation said, would need to involve the federal government, alone or in some combination with a private investor.While the bank, with 88 branches focused mostly on the coasts, is still open for business, no one connected to it, including its executives and some board members, would say how much longer it could exist in its current form.First Republic, based in San Francisco, has been widely seen as the most in-danger bank since Silicon Valley Bank and Signature Bank collapsed last month. Like Silicon Valley Bank, it catered to the well-off — a group of customers able to pull their money en masse — and amassed a hoard of loans and assets whose value has suffered in an era of rising interest rates.Yet while SVB and Signature survived just days under pressure, First Republic has neither fallen nor thrived. It has withstood a deposit flight and a cratering stock price. Every attempt by the bank’s executives and advisers to project confidence appears to have had the opposite effect.The bank’s founder and executive chairman, Jim Herbert, until recently one of the more admired figures in the industry, has disappeared from public view. On March 13, Jim Cramer, the CNBC host, said on the air that Mr. Herbert had told him that the bank was doing “business as usual,” and that there were “not any sizable number of people wanting their money.”That was belied by the bank’s earnings report this week, which stated that “First Republic began experiencing unprecedented deposit outflows” on March 10.Neither Mr. Herbert nor the bank’s representatives would comment Wednesday, as First Republic’s stock continued a harrowing slide, dropping about 30 percent to close the day at just $5.69 — down from about $150 a year earlier. On Tuesday, the stock plummeted 49 percent. The company is now worth a little more than $1 billion, or about one-twentieth its valuation before the banking turmoil began in March.In what has become a disquieting pattern, the New York Stock Exchange halted trading in the shares 16 times on Wednesday because volatility thresholds were triggered.

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    First Republic Bank’s share price
    Source: FactSetBy The New York TimesStock prices are always an imperfect measure of a lender’s health, and there are strict rules about what types of entities can acquire a bank. Still, First Republic’s stock slide means that its branches and $103 billion in deposits could be bought for, theoretically, an amount less than the market capitalization of Portillo’s, the Chicago-area hot dog purveyor. Of course, any company that buys First Republic would be taking on multibillion-dollar losses on its loan portfolio and assets.The bank is more likely to fall into the hands of the government. That outcome would likely wipe out shareholders and put the bank’s fate in the hands of the Federal Deposit Insurance Corporation.The F.D.I.C. by its own rules guarantees that deposit accounts only up to $250,000 will be made whole, though in practice — and in the case of SVB and Signature — it can make accounts of all sizes whole if several top government officials invoke a special legal provision. Of First Republic’s remaining deposits, roughly half, or nearly $50 billion, were over the insured threshold as of March 31, including the $30 billion deposited by big banks in March.In conversations with industry and government officials, First Republic’s advisers have proposed various restructuring solutions that would involve the government, in one form or another, according to people familiar with the matter. The government could seek to minimize a buyer’s financial risk, the people said, asking not to be identified.Thus far, the Biden administration and Federal Reserve appear to have demurred. Policy experts have said officials would find it more difficult to intervene to save First Republic because of restrictions Congress enacted after the 2008 financial crisis.As a result, six weeks of efforts by First Republic and its advisers to sell all or part of its business have not resulted in a viable plan to save the bank — at least thus far.The state of affairs became plain after the close of trading on Monday, when First Republic announced first-quarter results that showed that it had lost $102 billion in customer deposits since early March. Those withdrawals were slightly ameliorated by the coordinated emergency move of 11 large U.S. banks to temporarily deposit $30 billion into First Republic.To plug the hole, First Republic borrowed $92 billion, mostly from the Fed and government-backed lending groups, essentially replacing its deposits with loans. While the move helped keep the bank going, it essentially undermined its business model, replacing relatively cheap deposits with more expensive loans.The bank is paying more in interest to the government on that new debt than it is earning on its long-term investments, which include mortgage loans to its well-heeled customers on the coasts, funding for real estate projects and the like.One of the biggest parts of the bank’s business was offering large home loans with attractive interest rates to affluent people. And unlike other banks that make a lot of mortgages, First Republic kept many of those loans rather than packaging them into mortgage-backed securities and selling them to investors. At the end of December, the bank had nearly $103 billion in home loans on its books, up from $80 billion a year earlier.But most of those loans were made when the mortgage interest rates were much lower than they are today. That means those loans are worth a lot less, and anybody looking to buy First Republic would be taking on those losses.It is not clear what First Republic can realistically do to make itself or its assets more attractive to a buyer.Among the only tangible changes that the bank has committed to is cutting as much as 25 percent of its staff and slashing executive compensation by an unspecified amount. On its earnings call, First Republic’s executives declined to take questions and spoke for just 12 minutes. More

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    First Republic Bank Enters New Free Fall as Concerns Mount

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    The bank’s shares fell by about 50 percent on Tuesday, a day after it said customers had pulled $100 billion in deposits in the first quarter.First Republic Bank’s stock closed down 50 percent Tuesday, a day after a troubling earnings report and a conference call with analysts in which the company’s executives refused questions. The speed of the decline set off a series of volatility-induced trading halts by the New York Stock Exchange.On Monday, after the close of regular stock trading, First Republic released results that showed just how perilous the bank’s future had become since mid-March following the failure of Silicon Valley Bank and Signature Bank. First Republic said its clients pulled $102 billion in deposits in the first quarter — well over half the $176 billion it held at the end of last year.The bank received a temporary $30 billion lifeline last month from the nation’s biggest banks to help shore up its business. Those banks, however, can withdraw their deposits as soon as July. In the first quarter, First Republic also borrowed $92 billion, mostly from the Federal Reserve and government-backed lending groups, essentially replacing its deposits with loans.First Republic is considered the most vulnerable regional bank after the banking crisis in March. What happens to it could also affect investors’ confidence in other regional banks and the financial system more broadly.The bank’s executives did little to establish confidence during its conference call, offering just 12 minutes of prepared remarks. The bank also said on Monday that it would cut as much as a quarter of its work force, and slash executive compensation by an unspecified sum.“This is a trust issue, as it is for any bank, and when trust is lost, money will flee,” Aswath Damodaran, a finance professor at New York University, wrote in an email.An analyst at Wolfe Research, Bill Carcache, laid out what he called “the long list of questions we weren’t allowed to ask” in a research note on Tuesday. Among them: How can the bank survive without raising new money, and how can it continue to provide attentive customer service — a staple of its reputation among wealthy clients — while cutting the very staff who provide it?The bank’s options to save itself absent a government seizure or intervention are limited and challenging. No buyer has emerged for the bank in its entirety. Any bank or investor group interested in taking over the bank would have to take on First Republic’s loan portfolio, which could saddle the buyer with billions of dollars in losses based on the recent interest rate moves. The bank is also difficult to sell off in pieces because its customers use many different services like checking accounts, mortgages and wealth management.There are no easy solutions for First Republic’s situation, said Kathryn Judge, a financial regulation expert at Columbia Law School. “If there were attractive options, they would have pursued them already,” Ms. Judge explained.The Fed can no longer take on some of a bank’s financial risk to ease a takeover in the way it did in 2008, because reforms after the financial crisis changed its powers. And while the Federal Deposit Insurance Corporation might be able to help in some way, that would most likely involve failing the bank and invoking a “systemic risk exception,” which would require sign-off by officials across several agencies, Ms. Judge said.Yet if the bank does fail, the government will have to decide whether to protect its uninsured depositors, which could also be a tough call, she said.“There’s really no easy answer,” Ms. Judge said.Representatives for the Fed and the F.D.I.C. declined to comment.Shares of other banks also fell on Tuesday, though not nearly as much as First Republic. The KBW Bank Index, a proxy for the industry, closed down about 3.5 percent.Separately, the Fed said on Tuesday that its review of the supervision and regulation of Silicon Valley Bank will be released at 11 a.m. on Friday.Rob Copeland More

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    First Republic Bank Lost $102 Billion in Customer Deposits

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    The regional bank received a $30 billion lifeline from big banks last month, but depositors and investors remain worried about its prospects.First Republic Bank, the most imperiled U.S. lender after last month’s banking crisis, on Monday disclosed the grisly details of just how troubled its business has become — and not much else.In the bank’s highly anticipated first update to investors since entering a free-fall over the past month and a half, its leaders said little. In a conference call to discuss its first quarter results with Wall Street analysts, the bank’s executives offered just 12 minutes of prepared remarks and declined to take questions, leaving investors and the public with few answers about how it would escape its crater.“When a bank feels like it has few options remaining, it starts to play by its own rules,” said Timothy Coffey, a bank analyst at Janney Montgomery Scott. “Every day, every week from now until whenever — it’s going to be a fight for them.”One thing is certain: The bank, which caters to a well-heeled clientele on the coasts, seems to be hanging by a thread. During the first quarter, it lost a staggering $102 billion in customer deposits — well over half the $176 billion it held at the end of last year — not including a temporary $30 billion lifeline it received from the nation’s biggest banks last month.Over that same period, it borrowed $92 billion, mostly from the Federal Reserve and government-backed lending groups, essentially replacing its deposits with loans. That’s a perilous course for any bank, which generally do business by taking in relatively inexpensive customer deposits while lending money to home buyers and businesses at much higher interest rates.First Republic is still making some money; it reported a quarterly profit of $269 million, down one-third from a year earlier. It made far fewer loans than it had in earlier quarters, keeping with a general trend in banking, as industry executives worry about a recession and softening home prices and sales.The bank’s stock dropped about 20 percent in extended trading, with the fall worsening after executives declined to take questions from analysts.First Republic’s share price is down more than 85 percent since mid-March.The bank said that its deposit exodus largely ceased by the last week of March. From March 31 to April 21, the bank said that it lost only 1.7 percent of its deposits and that most of those withdrawals were related to tax payments by its clients.The slide began roughly six weeks ago, when the midsize lenders Silicon Valley Bank and Signature Bank were taken over by federal regulators after customers pulled billions of dollars in deposits. First Republic, based in San Francisco, was widely seen as the lender most likely to fall next, because it had many clients in the start-up industry — similar to Silicon Valley Bank — and many of its accounts held more than $250,000, the limit for federal deposit insurance.First Republic has been in talks with financial advisers and government officials to come up with a plan to save itself that could include selling the bank or parts of it, or raising new capital.Much more remains to be done. The bank said on Monday that it would cut as much as a quarter of its work force, and slash executive compensation by an unspecified sum.Until recently, First Republic was a darling of Wall Street. It was founded in 1985 by Jim Herbert, who is still the bank’s executive chairman at 78. The company distinguished itself by offering wealthy clients jumbo mortgages, which can’t be sold to the government-backed mortgage giants Fannie Mae and Freddie Mac. Mr. Herbert consistently touted First Republic’s business model as a sound one because its borrowers had good credit records.In 2007, Merrill Lynch paid $1.8 billion to acquire the bank, but its ownership lasted only three years. Mr. Herbert, with the help of other investors, bought the bank back after the 2008 financial crisis and took it public.Since then, First Republic has focused on expanding by setting up branches in the poshest parts of New York, Boston, San Francisco and Los Angeles and in places synonymous with wealth like Greenwich, Conn., and Palm Beach, Fla. The bank’s branches endeared themselves to clients and prospective customers with personal touches, like warm, freshly baked cookies.Janna Koretz, a 37-year-old psychologist in Boston, started banking with First Republic roughly a decade ago as she was building a group practice. “It’s not like I had all this money,” she said, but her banker was constantly available. The bank would send couriers to her office to pick up cash from her practice.In mid-December, the bank hosted a holiday party at a performing arts space in Manhattan for hundreds of employees and clients, according to two attendees who spoke on the condition of anonymity because they wanted to preserve their relationships with the bank. A graffiti artist wielding black spray paint, and flamenco dancers entertained the crowd. The bank’s chief executive Mike Roffler, who had been in the top job only since March of 2022, warned the crowd that 2023 could be a challenging year for the bank.Three months later, the bank found itself in the spotlight of a different sort. In the days and weeks after Silicon Valley Bank’s demise, numerous larger banks looked into buying First Republic. But a deal didn’t come together and the chief executive of JPMorgan Chase, Jamie Dimon, and the Treasury secretary, Janet L. Yellen, worked together to inject $30 billion in deposits into the bank. The big banks that put in that money can withdraw it in as soon as four months.On the brief conference call on Monday, Mr. Roffler said little about what could happen next and merely reiterated the bank’s public disclosures. “I’d like to take a moment to thank our colleagues for their commitment to First Republic and their uninterrupted service of our clients and communities throughout this challenging period,” he said. “Their dedication is inspiring.” More

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    Push to Insure Big Deposits Percolates on Capitol Hill

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    The government insures only deposits of less than $250,000, but there is precedent for lifting that cap amid turmoil. It could happen again.WASHINGTON — Lawmakers are looking for ways to resolve a major concern that threatens to keep the banking industry in turmoil: The federal government insures bank deposits only up to $250,000.Some members of Congress are looking for ways to boost that cap, at least temporarily, in order to stop depositors from pulling their money out of smaller institutions that have been at center of recent bank runs.Representative Ro Khanna, Democrat of California, and other lawmakers are in talks about introducing bipartisan legislation as early as this week that would temporarily increase the deposit cap on transaction accounts, which are used for activities like payroll, with an eye on smaller banks. Such a move would potentially reprise a playbook used during the 2008 financial crisis and authorized at the onset of the coronavirus pandemic in 2020 to prevent depositors from pulling their money out.Others, including Senator Elizabeth Warren, Democrat of Massachusetts, have suggested lifting the deposit cap altogether.Any broad expansion to deposit insurance could require action from Congress because of legal changes made after the 2008 financial crisis, unless government agencies can find a workaround. The White House has not taken a public position, instead emphasizing the tools it has already rolled out to address banking troubles.Many lawmakers have yet to solidify their positions, and some have openly opposed lifting the cap, so it is not clear that legislation adjusting it even temporarily would pass. While such a move could calm nervous depositors, it could have drawbacks, including removing a big disincentive for banks to take on too much risk.Still, Senate staff members from both parties have been in early conversations about whether it would make sense to resurrect some version of the previous guarantees for uninsured deposits, according to a person familiar with the talks.Even after two weeks of aggressive government action to shore up the banking system, jitters remain about its safety after high-profile bank failures. Some worry that depositors whose accounts exceed the $250,000 limit may pull their money from smaller banks that seem more likely to crash without a government rescue. That could drive people toward bigger banks that are perceived as more likely to have a government guarantee — spurring more industry concentration.“I’m concerned about the danger to regional banking and community banking in this country,” Mr. Khanna said in an interview. He noted that if regional banks lose deposits as people turn to giant banking institutions that are deemed too big to fail, it could make it harder to get loans and other financing in the middle of the country, where community and regional banks play a major role.“This should be deeply concerning, that our regional banks are losing deposits, and losing the ability to lend, he said.Representative Ro Khanna said broad temporary expansions to deposit insurance would likely require action from Congress.T.J. Kirkpatrick for The New York TimesIf passed, a temporary guarantee on transaction deposits over the $250,000 federal insurance cap would be the latest step in a sweeping government response to an unfolding banking disaster.Silicon Valley Bank’s failure on March 10 has rattled the banking system. The bank was ill prepared to contend with the Federal Reserve’s interest rate increases: It held a lot of long-term bonds that had declined in value as well as an outsize share of uninsured deposits, which tend to be withdrawn at the first sign of trouble.Still, its demise focused attention on other weak spots in finance. Signature Bank has also failed, and First Republic Bank has been imperiled by outflows of deposits and a plunging stock price. In Europe, the Swiss government had to engineer the takeover of Credit Suisse by its competitor UBS.The U.S. government has responded to the turmoil with a volley of action. On March 12 it announced that it would guarantee the big depositors at Silicon Valley Bank and Signature. The Federal Reserve announced that it would set up an emergency lending program to make sure that banks had a workaround to avoid recognizing big losses if they — as Silicon Valley Bank did — needed to raise cash to cover withdrawals.And on Sunday, the Fed announced that it was making its regular operations to keep dollar financing flowing around the world more frequent, to try to prevent problems from extending to financial markets.For now, the administration has stressed that it will use the tools it is already deploying to protect depositors and ensure a healthy regional and community banking system.“We will use the tools we have to support community banks,” Michael Kikukawa, a White House spokesman, said Monday. “Since our administration and the regulators took decisive action last weekend, we have seen deposits stabilize at regional banks throughout the country, and, in some cases, outflows have modestly reversed.”The midsize Bank Coalition of America has urged federal regulators to extend Federal Deposit Insurance Corporation protection to all deposits for the next two years, saying in a letter late last week that it would halt an “exodus” of deposits from smaller banks.“It would be prudent to take further action,” Mr. Khanna said.Yet not even all banking groups agree that such a step is necessary, especially given that a higher insurance cap might incite more regulation or lead to higher fees.The midsize Bank Coalition of America has urged federal regulators to extend F.D.I.C. insurance to all deposits for the next two years.Al Drago for The New York TimesLifting the deposit cap temporarily could send a signal that the problem is worse than it is, said Anne Balcer, senior executive vice president of the Independent Community Bankers of America, a trade group for small U.S. banks. She said many of its member banks were seeing an increase in deposits.“Right now, we’re in a phase of let’s exercise restraint,” she said.There is precedent for temporarily expanding deposit insurance. In March 2020, Congress’s first major coronavirus relief package authorized the F.D.I.C. to temporarily lift the insurance cap on deposits.And in 2008, as panic coursed across Wall Street at the outset of the global financial crisis, the F.D.I.C. created a program that allowed for unlimited deposit insurance for transaction accounts that chose to join the program in exchange for an added fee.Peter Conti-Brown, a financial historian and a legal scholar at the University of Pennsylvania, said the 2010 Dodd-Frank law ended the option for the agencies to temporarily insure larger transaction accounts the way they did in 2008.Now, he said, the regulators would either need congressional approval, or lawmakers would have to pass legislation to enable such a broad-based backstop for deposits. While regulators were able to step in and promise to protect depositors at Silicon Valley Bank and Signature Bank, that is because the collapse at those banks was deemed to have the potential to cause broad problems across the financial system.For smaller banks, where failures would be much less likely to have systemwide implications, that means that uninsured depositors might not receive the same kind of protection in a pinch.In a nod to those worries, Janet L. Yellen, the Treasury secretary, suggested on Tuesday that even smaller banks could warrant a “systemic” classification in some cases, allowing the agencies to backstop their deposits.“The steps we took were not focused on aiding specific banks or classes of banks,” Ms. Yellen said in a speech. “And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.”But the chances that such an approach — or another workaround that allows the government to take the action without passing legislation, such as tapping a pot of money at the Treasury called the Exchange Stabilization Fund — would be effective are not yet clear.Sheila Bair, who was chair of the F.D.I.C. from 2006 to 2011, said she thought that the Biden administration should propose legislation that would let the F.D.I.C. reconstitute a bigger deposit insurance program and use a “fast-track” legislative process to put it in place.While Dodd-Frank curbed the ability of the F.D.I.C. to restart the transaction account guarantee program on its own, it did provide for a streamlined process for future lawmakers to get it up and running again, she said.“I hope the president asks for it; I think it would settle things down pretty quickly,” Ms. Bair said in an interview. But some warned that enacting broad-based deposit insurance could set a dangerous precedent: signaling to bank managers that they can take risks unchecked, and leading to calls for more regulation to protect taxpayers from potential costs.Aaron Klein, a senior fellow in economic studies at the Brookings Institution, said he would oppose even a revamp of the 2008 deposit insurance because he thought it would be temporary in name only: It would reassert to big depositors that the government will come to the rescue.“If we think the market is going to believe that these things are temporary when they are constantly done in times of crisis,” he said, “then we’re deluding ourselves.”Alan Rappeport More