Lots will be written on the rise and fall of First Republic Bank. Its customer service was legendary in the banking system, as was its list of rich clients with ample deposits and a healthy appetite for issuing jumbo mortgages to highly creditworthy borrowers. Yet it went from being admired to being seized by regulators and sold to another bank.
Article cross-posted from Zero Hedge.
Another California bank failure for Mary Daly's @sffed which is more concerned about DEI, colorful flags, virtue signaling and climate change than, you know, actually supervising insolvent banks
— zerohedge (@zerohedge) May 1, 2023
What emerged on Monday morning was far from perfect, despite weeks of discussions and posturing. What we have are US government institutions caught up in the policy implications of a “second best” world — that is, the repeated inability to come up with an optimal solution. What’s emerged will come with collateral damage and unintended consequences.
First Republic found itself in a similar situation to Silicon Valley Bank, which was shut down by regulators in March. Its failure to manage an interest rate mismatch on its balance sheet ultimately crippled it as deposits flew out the door in response to the earlier bank failures. Its vulnerability was amplified by the Federal Reserve’s initial mischaracterization of inflation as transitory, the failure to take timely measures, and the inevitably highly concentrated set of hikes that followed.
The inevitable assessments of First Republic’s failure are also likely to point to significant lapses in bank supervision and regulation — the type of failures that were detailed last Friday in a report by the Fed that, refreshingly and encouragingly, saw the central bank finally take ownership of a mistake and seek to learn from it. Unlike other major central banks, it had repeatedly failed to do so when it comes to monetary policy.
First Republic became increasingly fragile as the contraction in deposits worsened funding costs, deepened a capital hole, and plummeted its stock price by around 95%. That was the bad news. The good news was that, at least on paper, there was a constructive alignment of incentives among the main actors in the bank resolution process.
Having already lost three institutions, the banking system as a whole desperately needed an orderly resolution for First Republic that minimized the risk of further disruptions.
This was not just the case for regional and community banks where the risks of flighty deposits and duration mismatches were under a bright spotlight. It was also the case for the 11 larger banks as they had injected tens of billions of deposits into First Republic in an earlier attempt to stabilize the situation.
It was also the case for regulators, especially the Federal Deposit Insurance Corp. and the Fed. The FDIC wanted to avoid being on the hook for financial losses and having to dispose of yet another bank’s assets and liabilities; and the Fed did not want to trigger yet again the “systemic risk” clause to allow for an extension of deposit insurance to theoretically uninsured deposits. The Fed was also keen to keep the door open for the policy “separation principle” that has interest rate policy aimed at inflation reduction and other tools used for financial stability.
Despite this alignment, it took weeks for a solution to emerge. And when it did, it involved unfavorable spillovers, as well as having one of the nation’s biggest and most dominant bank – JPMorgan – becoming even more so. With this comes the further evolution of the largest financial institutions from major sources of systemic risk to stabilizers of the system itself. Moreover, and also departing from the previous conventional wisdom, the bigger and more diversified banks are now being considered “safer” than the narrow banks which have either no or a very limited range of capital market activities that have traditionally been viewed as a source of financial stability risk.
The solution that emerged early Monday morning deals with the immediate threat of a disorderly failure of First Republic and, therefore, does not fuel the already uncomfortable risk of possible additional disruptions to other regional and community banks.
Yet the potential collateral damage and the unintended consequences are far from immaterial.
Four stand out in particular.
- First, the US now has a more concentrated banking system, with what was once viewed not so long ago as “too big to fail”/”too big to manage” banks becoming larger.
- Second, there is even greater doubt about the nature of the de facto deposit insurance system in place.
- Third, the compositional risk within the banking system of less credit extending into the economy will continue, potentially aggravating the headwinds to high and inclusive growth.
- Finally, the total cost of First Republic’s resolution remains to be assessed, including how the burden be shared among the public and private sectors and, with that, the extent of the “bailout” for the 11 banks that had large deposits with First Republic.
The US economy continues to suffer from too many years of easy money, and the subsequent mishandling of the rate hiking cycle and lapses in supervision and regulation. With that comes the ever-present risk of collateral damage and unintended consequences given that first best policy responses are no longer available.
Two Storms, One Harvest
Every food crisis in living memory has been a one-shock event. The 2008 price spike was a commodity bubble. The 2020 shortages were a logistics failure. The 2022 grain scare was a war on one exporter’s ports. Each time, the system bent, adjusted, and recovered, and each time the experts assured us afterward that global markets are simply too big and too diversified to fail.
What nobody in Washington seems eager to discuss is that 2026 is shaping up to be something the modern food system has never actually faced. Two independent shocks, one climatic and one geopolitical, are converging on the same harvest cycle at the same time. Not sequentially. Simultaneously.
Start with the weather. The Pacific Ocean is currently building toward what forecasters now openly call a record event. NOAA’s Climate Prediction Center puts the odds of at least a strong El Niño near 88 percent, with roughly two in three odds it reaches “very strong” status, the tier reserved for perhaps three or four events in the entire satellite era. Every major global model now projects a median peak in Super El Niño territory, and most of them project it exceeding the 2015-16 event, which until now held the modern record. Sea surface anomalies were already brushing the super threshold in mid-July, months before these events normally peak. The atmosphere has already shifted into El Niño mode, and the event is forecast to crest in late fall and early winter.
This is not about “climate change.” It’s about the standard cycles of weather, and the cycle we’re currently in is one that has likely devastated societies in the past. We’re better prepared as a society today, but not all Americans are equally prepared.
Serious households have started doing the quiet math on their own. Grocery bills tell part of the story, and the forecast maps tell the rest, which is why long-term food storage has moved from fringe hobby to mainstream line item in the family budget, with established suppliers like Heaven’s Harvest seeing demand from people who five years ago would have rolled their eyes at the idea. That instinct is not paranoia. It is pattern recognition, and the pattern is worth walking through carefully.
Editor’s Note: Heaven’s Harvest IS a sponsor, but the warnings of this article are real and would be written even if we didn’t have a survival food sponsor. With that said, those who take advantage of what they offer can use promo code “Patriot” for 15% off.
The Fertilizer Clock Is Already Running
While the Pacific warms, the second shock has been unfolding in the Strait of Hormuz. The conflict with Iran turned the world’s most important energy chokepoint into a contested waterway, and the consequences reach far beyond the gas pump. Roughly a third of global fertilizer trade moves through Hormuz, and the disruption sent urea prices up 86 percent year over year by March, with a 53 percent jump in a single month.
The World Bank projects energy prices rising about 24 percent in 2026 and fertilizer about 31 percent. By its own accounting, fertilizer prices ran 35 percent higher in the first five months of this year than the same period last year.
Here is the mechanism the nightly news will not explain. Fertilizer is not a grocery item. It is a time-delayed input. The nitrogen a farmer in Iowa or Punjab could not afford to apply this spring does not show up as a problem this spring. It shows up as a thinner harvest six to twelve months later.
The World Bank’s own food security brief concedes that the effects of reduced applications earlier this season “are likely to become visible only later in harvest outcomes.” Translate that from institutional language into plain English and it means this. The damage is already done, it is already in the ground, and we are simply waiting for it to arrive on the shelf.
Now check the calendar. Six to twelve months from the spring planting season lands us squarely in late 2026 and early 2027. Which is precisely when the strongest El Niño in the instrumental record is forecast to peak, bringing its signature droughts to Southeast Asia, Australia, southern Africa, northern Brazil, and South Asia, the very regions that grow the world’s rice, sugar, and oilseeds.
The World Bank warns openly that a strong El Niño “could disrupt multiple crop belts simultaneously” on top of the conflict-driven input costs. Their baseline projection assumes the Middle East disruptions ease by autumn. What in the last two years of Middle East history suggests that assumption is safe?
The System Has No Slack Left
The comfortable answer is that global markets always adjust. But adjustment requires slack, and the slack is gone. Global cereal production is expected to decline from last year’s records even before El Niño does its work. The UN World Food Programme, hardly a den of right-wing preppers, is calling this the most significant disruption to its supply chains since Covid and the invasion of Ukraine, and its supply chain director put the stakes bluntly.
Today’s supply chain challenges are tomorrow’s hunger crisis.
There is also a political dimension that markets cannot price. When food gets scarce, governments do not behave like economists. They behave like politicians. Export bans, hoarding mandates, and panic buying at the national level turned the modest rice shortfall of 2008 into a global crisis, and analysts are already warning that import-dependent nations are the first dominoes.
The 2015-16 Super El Niño, a far weaker event than what is now forecast, threw tens of millions into food stress across Africa and Asia. This one is projected to be stronger, and it arrives with fertilizer already rationed by price and shipping lanes already contested by missiles.
What Joseph Knew
Scripture does not treat preparation for lean years as faithlessness. It treats it as wisdom delivered in advance to those willing to act on it.
Behold, there come seven years of great plenty throughout all the land of Egypt: And there shall arise after them seven years of famine; and all the plenty shall be forgotten in the land of Egypt.
Joseph did not respond to that warning with a hashtag or a committee. He stored grain during the years of abundance, and when the famine came, Egypt stood while its neighbors begged. The lesson is not that famine is certain. It is that the time to prepare is precisely when preparation still looks optional.
Nobody who filled a pantry in a year of plenty has ever regretted it, and nobody standing in an empty aisle has ever been glad he waited for certainty.
None of this calls for panic, and panic is the enemy of sound judgment anyway. It calls for the same unglamorous prudence our grandparents considered ordinary. Keep some cash margin, know your local growers, and put real food in deep storage while it is cheap and available, because the entire arc of this story is that cheap and available is a closing window.
Families looking for a straightforward place to start can visit Heaven’s Harvest and use promo code Patriot for 15 percent off long-term storable food. The forecasts may yet soften, the strait may yet reopen, and we should pray they do. But hope is a fine thing to hold and a foolish thing to eat.
All articles on banks are silly?!?!
Why? Who owns the banks?!
And El–Erian is Peterson Institute —- who was the last fave of the Peterson Institute in the news???
Saule Omarova —- ring any bells?!?!