Regulators seized First Republic Bank on May 1 and sold off its assets to JPMorgan Chase, wiping out the bank’s shareholders and making First Republic the fourth U.S. regional bank to fail this year.
Short selling is the process of borrowing a stock and selling it on the open market. If the stock’s price goes down, a short seller repurchases it at a lower price, profiting from the difference.
While regulators and Wall Street executives such as JPMorgan CEO Jamie Dimon attempt to reassure depositors and investors that the bank crisis is under control, stock traders are seeing blood in the water—and a lucrative opportunity to profit from the current crisis.
Banks continue to be targeted by short sellers if they have a large amount of deposits greater than the Federal Deposit Insurance Corp. (FDIC) limit of $250,000; if they’ve issued a large amount of longer-term, fixed-rate loans that make it less liquid in the face of a run on deposits; or if their business is concentrated in a small number of geographic areas or industries. In other words, if a bank does what banks traditionally have done: take in deposits and lend them out to the local community.
Once a bank becomes a headline target, depositors flee, the share price slumps, and traders cash in on their profits, leaving the bank to be acquired by a larger institution. According to banking analyst Alexander Yokum, more than 30 percent of First Republic’s shares were “shorted,” and, once it failed, short selling quickly moved on to other banks, such as Comerica, PacWest, and Western Alliance.
About half of all deposits across the U.S. banking industry are uninsured because they exceed the FDIC limit. However, among the four banks that have failed so far, Silicon Valley Bank (SVB) had 95 percent of its deposits uninsured, Signature Bank had 90 percent uninsured, and First Republic had 70 percent uninsured, according to Yokum.
“First Republic Bank’s 84 offices in eight states will reopen as branches of JPMorgan Chase Bank,” the FDIC stated. “All depositors of First Republic Bank will become depositors of JPMorgan Chase Bank ... and will have full access to all of their deposits.”
Depositors aren’t just leaving banks because they fear a collapse. As the Fed boosts interest rates to fight inflation, depositors are moving their money out of accounts that pay virtually no interest into money market funds or certificates of deposit that pay 4 to 5 percent.
Regional banks, which have often invested deposits in longer-term assets at low, fixed interest rates, can’t afford to pay depositors more and, upon a bank run, can’t liquidate these assets fast enough to repay depositors, calling into question to what extent the traditional banking model can survive in a period of rapidly rising interest rates. First Republic was particularly concentrated in low-interest mortgages that it had made to its wealthy clients; its loans were generally considered to be of high credit quality.
Economists are concerned that the loss of community banks will leave rural communities and small towns without banking services. Currently, about half of all small-business loans are provided by smaller community banks, Chris Cole, senior regulatory counsel for the Independent Community Bankers of America, told The Epoch Times.