In the space of a few months, we have seen the largest US bank defaults since 2008, with the latest example being First Republic Bank. This state-chartered bank, with $229 billion of assets, was closed on 1 May by its California regulator and handed over to JP Morgan in a deal brokered by the Federal Deposit Insurance Corporation.

We can see the impact on the asset side of JP Morgan’s vast balance sheet using our banking visualisation tool, using the Basel exposure-at-default measure with data from December 2022. There is barely a ripple when you toggle between the ‘before’ and ‘after’ charts – and that’s exactly the point.

When it took on FRB’s assets – a mix of residential mortgages, commercial real estate lending, corporate loans and securities – JP Morgan was backing them with its $2.5 trillion deposit base, something which FRB was unable to do with its own liabilities.

Starting with $177 billion deposits in December, FRB lost $75 billion of these by April, mostly uninsured cash parked by high-net-worth clients. According to a 2022 presentation, FRB enjoyed a low ‘beta’, paying just 19% of the Federal Funds Rate to depositors. When the depositors fled, it had to pay 100% of short-term rates, at the worst point of a Fed tightening cycle. It dared not shrink its balance sheet by selling ‘held-to-maturity’ securities it owned because it would have to mark them down by a quarter of their value. That markdown happened on Monday at the hands of JP Morgan.