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Is worst of California banking crisis over?

May 3, 2023

What started in March with the stunning collapse of Santa Clara-based Silicon Valley Bank continued Monday, as state regulators announced that they had seized San Francisco-based First Republic Bank, the second biggest bank failure in U.S. history.

Quickly, the Department of Financial Protection and Innovation said it appointed as receiver the Federal Deposit Insurance Corp., which brokered a sale of First Republic to JP Morgan Chase, the nation’s biggest bank.

Gov. Gavin Newson, in a statement: “In close partnership and coordination with the FDIC, California DFPI took decisive and critical action to stabilize the situation, avert layoffs, and protect Californians. The swift action by FDIC to secure a purchaser for the bank will protect depositors, including uninsured depositors.”

Despite the quick action and reassurances, inquiring minds may want to know:

Should we be worried about California-based banks being bought by out-of-state companies?
Is this the end of the immediate banking crisis, as JP Morgan CEO Jamie Dimon told analysts Monday?
Will California lawmakers do anything, or can they?

The answers to those questions seem to be: Maybe, maybe not — but a joint banking committee oversight hearing will be held on May 10, when state regulators will field queries about how these banks failed, whether new policies can be passed to prevent more failures and how state and federal laws can work together to protect consumers.

State Sen. Monique Limón, chairperson of the Senate committee on banking and financial institutions, told CalMatters that the public hearing was scheduled before First Republic Bank’s collapse, but now it’s “very, very timely” and the information they’ll learn “will apply to two banks and not just one.”

The Democrat from Santa Barbara said Monday that she hopes we’ve reached “the bulk” of this crisis, but “it’s a little premature to say what may come out in terms of legislation.”

Limón: “More than anything we want well-managed banks operating in California communities, period.”

But she also noted that if lawmakers want to pass new banking regulations, they may be preempted by the federal government. President Biden called Monday for more federal regulations over large and regional banks “to make sure that we’re not back in this position again.”

Everyone wants to avoid a repeat of the 2008-09 financial crisis, when several global financial institutions and investment banks failed, causing a recession and crashing economies around the world. Afterwards, Congress put in more guardrails for the banking industry, but in 2018 and 2019, rules were relaxed for regional banks with less than $250 billion in assets — including Silicon Valley Bank and First Republic.

On Friday, the Federal Reserve issued a report blaming those lessened regulations, bad management and its own lack of oversight for Silicon Valley Bank’s failure in early March. That spooked customers and investors at First Republic, which lost $100 billion in deposits since and saw its stock lose 97% of its value. Both California banks catered to wealthy clients whose accounts had more than the $250,000 protected by federal insurance.

The FDIC said that 84 of First Republic Bank’s offices, located in eight states, will reopen as JP Morgan Chase branches. First Citizens Bank, headquartered in Raleigh, N.C., bought the remaining assets of Silicon Valley Bank, doubling its size.Still, it’s the dollar amount that is likely to be the most contentious recommendation. Up to this point, the task force sought to downplay the number. One member, Cheryl Grills, told Wendy in April that the figure is “the least important piece” of its study, and that the news media’s “preoccupation” with it is “unfortunate.”

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