ANALYSIS: Does Banking Crisis Increase Urgency for Biden to Negotiate on Debt Ceiling?

Third U.S. Bank Failure in Two Months Unrelated to Debt Ceiling Standoff

Despite the recent bank failures and the political standoff over the nation’s debt ceiling, experts say the two situations are not related and are unlikely to impact each other. However, increasing public anxiety about the prospect of a default by the U.S. Treasury, combined with anti-inflation measures by the Federal Reserve Board, could drive interest rates to levels not seen in years, which could lead to banks that have based their business model on historically low interest rates facing an increased risk of failure.

Mismanagement and Rising Interest Rates

The recent failure of First Republic Bank was due to mismanagement and the bank’s inability to appreciate the sudden hike in interest rates. The bank’s management was focused on increasing deposits and not properly hedging against the risk of rate increases, which occurred over the past year. When rates rose suddenly, the bank was forced to raise the rates paid to depositors while the loans they had made to borrowers were based on the previous, lower, rates. Silicon Valley Bank and Signature Bank failed under similar circumstances.

No Taxpayer Money Involved

Many Americans have a hard time believing that government intervention in the banking crisis does not come out of the taxpayer’s pocket, but it’s true. Funds held by the Federal Reserve are not taxpayer funds, and while many people dislike it when the government steps in to bail out failing banks, it does not do so using tax money. JPMorgan Chase CEO Jamie Dimon sounded an optimistic note about the banking crisis after his company acquired First Republic, saying, “This is getting near the end of it, and hopefully this helps stabilize everything.”

Expert Opinions

• Mike Davis, founding partner at Olive Tree Ridge private equity firm, says, “First Republic Bank entering receivership over the weekend, and the subsequent purchase of the bank by JPMorgan is separate and distinct from the challenges that [President Joe] Biden is facing in negotiating options as it relates to the debt ceiling.”
• Robert Kravchuk, a fellow at the National Academy of Public Administration, says, “Respecting the debt ceiling dispute, this is actually a separate issue, and it is much more of a political dispute than a true economic one.”
• Ari Rastegar, CEO of Rastegar Property Company, says, “First Republic failure was mismanagement. This is about a bank grossly underappreciating interest rates hiking as quickly as they did.”
• EJ Antoni, a research fellow at the Center for Data Analysis, says, “The Fed had to raise rates hard and fast to slow inflation, but that exposed the interest rate risk it created [by keeping rates low for so long]. Many banks are now in a position where their assets are worth less than the banks paid for them.”

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