Investors warn of First Republic aftershocks at gloomy Milken gathering

Top investors attending the annual Milken conference have warned against complacency following the rescue of First Republic, arguing the third seizure of a bank by US regulators since March threatens to constrain credit and worsen an economic slowdown.

The seizure of First Republic and the rapid sale of the remains of the bank to JPMorgan was thrashed out in the early hours of Monday morning as investors and financiers descended on Beverly Hills for the Milken Institute conference, one of the biggest gatherings of its kind.

Although the failure of the ailing California bank resulted in a sell-off in some lenders’ shares on Monday, it did not spark the same degree of market mayhem as the earlier collapse of Silicon Valley Bank and Signature Bank, prompting relative relief among financial executives and Biden administration officials.

However, several prominent investors used the opening day of the conference to predict aftershocks following the recent turmoil. They argued banks would be forced to comply with tougher rules that could crimp their ability to lend just as the US economy is starting to feel the full force of the Federal Reserve’s aggressive interest rate rises.

“There is a little bit of a tendency to kind of breathe a sigh of relief on mornings like this,” David Hunt, chief executive of $1.2tn asset manager PGIM, told Milken attendees digesting the First Republic rescue. “Actually, we’re just starting the implications for the US economy.”

“First of all, we’re going to see a real ratcheting-up of regulation in the banking system, particularly on many . . . regional lenders,” said Hunt, adding that the impact of new rules would be “quite constraining”.

“What that will do is . . . further hinder the supply of credit that’s going into the economy. And I think that we are going to see now a real slowing that begins to happen to aggregate demand.”

Rishi Kapoor, chief executive of Bahrain-based Investcorp, said there was “no doubt that the second- and third-order effect on the banking sector . . . is going to cause constraining financial conditions”.

Kristalina Georgieva

Others cautioned that sticky inflation meant the US central bank had less room for manoeuvre if the economy does stall and said some investors were engaging in wishful thinking by predicting the Fed will cut interest rates this year after implementing a final 25 basis points increase this week.

“That’s a primed-for-disappointment situation,” said Karen Karniol-Tambour, co-chief investment officer of hedge fund giant Bridgewater Associates, referring to market pricing suggesting investors think the US central bank will cut rates twice before the year is out.

“It’s time for the markets to fully digest how constrained central banks are going to be relative to the last 30, 40 years, when every time there was a tiny murmur of a problem, you could just lower rates [and] print money.”

Meanwhile, Kristalina Georgieva, head of the IMF, blamed “complacency” for the US bank failures. “We know there was unnecessary deregulation . . . and now we saw the price to pay. We saw supervision has not been up to par.”

Georgieva also warned the rapid pace of the recent US bank runs, which were fuelled by savers’ ability to move money online with a single click, would require “a lot of new regulatory . . . thinking about how we deal with this.

 “It is the speed money can move from one place to another. It goes into the territory of the unthinkable.”

However, some speakers at the conference said the turmoil had demonstrated the overall resilience of American banks. “When you take a step back and look at the structure of the US financial system, it’s incredibly sound,” said Citigroup chief executive Jane Fraser.

She pointed to an ultimately unsuccessful attempt to prop up First Republic that saw her institution and other large banks deposit $30bn with the ailing California lender.

“We were in a position to do it, which everyone should take incredible comfort in,” said Fraser, although she conceded the lifeline had merely bought First Republic some time.

The head of a large private capital firm, speaking on the condition of anonymity, said institutions like his would be able to take rising defaults and valuations in their stride.

“To me, it’s kind of rainy weather,” the executive said as Beverly Hills was being pelted with an unusually heavy storm. “Prices will be lower but it is not like a meteor hitting earth or an extinction-level event. It is just normal market functioning and a reset.” 

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