President Biden has now presided over three of the four largest bank failures in U.S. history and experts are warning the Federal Reserve’s interest rate regime could lead to additional problems across the sector.
Since March, three major banks — First Republic Bank, Silicon Valley Bank and Signature Bank which had assets worth $212 billion, $209 billion and $110 billion, respectively, according to Federal Reserve data — have imploded in the wake of high interest rates and poor management decisions. The Federal Deposit Insurance Corporation (FDIC) has estimated its actions to resolve the failures will cost taxpayers about $36 billion.
“The Federal Reserve, the Treasury, this entire administration, frankly, has been very inconsistent with their operations in financial markets,” E.J. Antoni, an economist and research fellow at The Heritage Foundation, told Fox News Digital in an interview. “So they will do one thing in one instance and then something completely different in the next.”
“However, if this last episode is any indication, as the federal government gets increasingly desperate in this banking crisis, as the crisis continues to escalate, what we’re seeing is an increasing willingness to basically use taxpayer money to bail out these institutions,” Antoni added.
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On Monday, the FDIC announced that JPMorgan Chase would pay the agency $10.6 billion to take control of most First Republic assets, but that the move would cost the FDIC Deposit Insurance Fund about $13 billion. That federally-managed fund was created in the 1930s to provide a backstop in the event of major bank failures.
The March failure of Silicon Valley Bank cost the Deposit Insurance Fund $20 billion and the collapse of Signature bank shortly thereafter cost the fund about $3 billion.
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“Normally we would see larger banks acquiring these regional banks because they’re a good deal right now,” Thomas Hogan, a senior research faculty at the American Institute for Economic Research and former chief economist on the Senate Banking Committee, said in an interview.
“Now that they’ve seen the government is willing to provide assistance, they’re going to wait until the banks are basically failed and then the government’s willing to provide some bailout package in order to make that acquisition possible,” Hogan said. “That definitely is what happened with First Republic and JPMorgan Chase.”
“It’s a bad incentive. The precedent they’ve set is going to make private banks less willing to acquire or bail out these failing institutions.”
According to Hogan, at least four regional banks are also facing significant market pressures. First Horizon Bank, PacWest Bancorp and Western Alliance all saw their share price plummet during trading on Thursday.
Hogan, Antoni and Stephen Moore, a senior economist at FreedomWorks, largely blamed the bank failures on interest rate hikes that the Federal Reserve has pursued over the last year.
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“A lot of these banks hold government bonds that are now worth — they’ve dropped in value by about 30% because of the huge interest rate spike over the last year. So, their balance sheets look horrible now because of some of the Fed actions,” Moore told Fox News Digital.
“The reason the Fed had to take those actions was because we had this extraordinary spending spree,” he added. “You had a completely indefensible spending spree after COVID was over. Then you had prices rise. Inflation went to 9%. And then you had the Fed forced to respond to that by this almost unprecedentedly rapid interest rate rises.”
On March 11, 2021, Biden signed the American Rescue Plan, his signature $1.9 trillion COVID-19 stimulus package that was criticized at the time as unnecessary given the pandemic’s progress.
Since then, year-over-year inflation has worsened from 2.6% to a more than four-decade high of 9.1% in June 2022, but has come down to 5% as of March. The slowed inflation rate rise has been coupled by rapid Federal Reserve rate hikes, from near-zero 0.25% in March 2022 to 5.25% this month.
The Federal Reserve was widely criticized for maintaining extremely low pandemic-era interest rates for too long.
“When you force financial institutions to hunt for yield — which is exactly what they did by putting rates to zero and keeping them there for so long — you’re also forcing banks to take increasingly leveraged positions,” Antoni said.
“In other words, instead of just keeping a relatively large percent of deposits on hand because they can easily make money in relatively safe investments, they now have to take virtually all deposits and put virtually all of them into very risky positions,” he continued. “So, again, it’s an increase in leverage that didn’t have to happen. And now this is all coming home to roost.”
Meanwhile, the Federal Reserve and White House have stated that the banking system is safe in an attempt to assuage fears.
“I’m going to ask Congress and the banking regulators to strengthen the rules for banks to make it less likely that this kind of bank failure will happen again and to protect American jobs and small businesses. Look, the bottom line is this: Americans can rest assured that our banking system is safe,” Biden remarked in March.
“Your deposits are safe. Let me also assure you: We will not stop at this. We’ll do whatever is needed on top of all this,” he said.
And Federal Reserve Chair Jerome Powell said Wednesday that the banking system remains resilient despite recent “strains,” Reuters reported.