Friday, April 28, 2023

First Republic and George Selgin on Bank Runs

Click here to read the original Cautious Optimism Facebook post with comments

Economist George Selgin
The Wall Street Journal is reporting that troubled San Francisco-based First Republic Bank is on the cusp of being seized by the FDIC and its assets sold to JP Morgan Chase and PNC Financial Group.

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First Republic, which like Silicon Valley Bank invested heavily over long terms at very low interest rates, has suffered from massive depositor withdrawals over the last six weeks. In its recent quarterly SEC filing First Republic announced it has lost over $100 billion of its $176 billion in deposits during the first quarter (-57%) partially offset by a $30 billion deposit injection by a consortium of major banks.

In other words, First Republic was suffering from a slow-motion bank run.

At which point the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff would like to cite the wisdom of monetary economist George Selgin whom he has learned much from over the years.

Regarding the subject of depositors running on banks:

"Real life bank runs are seldom unprovoked. They're almost always runs on banks that are in trouble beforehand, that have been badly managed, that their loans are not performing, etc... 

".....They're not failing because they're being run upon. They're run upon because they're failing. And the runs have the desirable effect of shutting down the banks before they can pile up losses and cause even greater harm to their creditors..."

"...It's not random, it's depositors saying 'we hear you guys have blown it and we want to cash out.'"

-George Selgin

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