In an effort to stop additional banking turbulence in the United States, regulators seized the ailing First Republic Bank early on Monday, making it the second-largest bank failure in American history. They then immediately sold all of its deposits and the majority of its assets to JPMorgan Chase Bank.
The First Republic, situated in San Francisco, is the third midsize bank to fall in the past two months. Washington Mutual, which failed at the height of the 2008 financial crisis and was also acquired by JPMorgan, was the only greater bank failure.
Since the March failures of Silicon Valley Bank and Signature Bank, First Republic has struggled, and investors and depositors have grown increasingly concerned that it won’t survive due to a large number of uninsured deposits and exposure to low-interest loans.
JPMorgan Chase to the Rescue
The 84 First Republic Bank locations in eight states will reopen as JPMorgan Chase Bank locations on Monday, according to the Federal Deposit Insurance Corporation. Depositors will have complete access to all of their funds.
Before the U.S. stock markets opened, regulators worked all through the weekend and into late last week to come up with a solution. They requested bids for the assets of First Republic Bank and once more resorted to JPMorgan Chase, the biggest bank in the country with a track record of brokering deals in difficult circumstances. Additionally, last month, JPMorgan was enlisted by Treasury officials to lead a $30 billion funding package for the First Republic Bank.
“Our government invited us and others to step up, and we did,” said Jamie Dimon, chairman and CEO of JPMorgan Chase.
What went down?
According to the FDIC, First Republic has $104 billion in total deposits as of April 13 and roughly $229 billion in total assets. The FDIC predicted that placing First Republic Bankc in receivership would cost its deposit insurance fund $13 billion. A record $20 billion was spent by the fund in order to save Silicon Valley Bank.
First Republic Bank possessed a banking franchise that was the envy of the majority of the industry before Silicon Valley Bank went under. Its clientele, who were mainly wealthy and powerful, hardly ever missed their loan payments. The bank has reportedly mentioned Meta Platforms CEO Mark Zuckerberg among those who have benefited from low-interest loans from the bank.
First Republic saw its total assets more than double from $102 billion at the end of the first quarter of 2019, when it had 4,600 full-time employees, thanks to deposits from the wealthy.
However, the vast majority of its deposits were uninsured, which is to say that they exceeded the $250,000 FDIC insurance cap, just like those at Silicon Valley and Signature Bank. Investors and experts were concerned about this. Depositors of First Republic might not get all of their money back if the business fails.
Why First Republic Bank Was Seized and Sold to JPMorgan Chase
What were the reactions of customers and investors?
Recent quarterly reports from the bank encapsulated these worries. Following the failure of Silicon Valley and Signature Bank, customers reportedly rushed to withdraw more than $100 billion in deposits, according to First Republic. Unlike previous bank runs, the demise of First Republic was sped up by social media and instantaneous digital withdrawals via mobile devices.
The First Republic, situated in San Francisco, claimed that the $30 billion in cash it obtained from several big banks in the middle of March helped it stop the hemorrhage. The bank intended to sell off underperforming assets, including the low-interest mortgages it gave to an affluent clientele, in order to turn around. Additionally, it disclosed plans to fire up to 25% of its workforce, which at the end of 2022 numbered around 7,200 people.
Investors had their doubts, and the shocking quarterly report made them flee. Shares of First Republic Bank decreased by 75% last week and finished at $3.51 on Friday. Any remaining shareholders will probably be eliminated. On March 8, just before Silicon Valley Bank folded, the shares traded for $115.
The Office of Comptroller of the Currency, the Federal Reserve, and the FDIC, who together supervise the banking sector, may come under fresh fire for how they handled the First Republic Bank. In separate assessments released on Friday, both parties agreed that inadequate oversight had contributed to Silicon Valley Bank and Signature Bank’s collapse.
There may be a sense of déjà vu for Dimon and JPMorgan because, in 2008, JPMorgan bought both Bear Stearns and Washington Mutual, and Dimon served as Washington’s go-to banker for private solutions to the banking crisis.
JPMorgan presented the First Republic purchase as advantageous for the company and the financial system in a statement. The FDIC will split losses on First Republic’s loans with JPMorgan in accordance with the agreement. Although JPMorgan anticipates spending $2 billion integrating First Republic into its operations over the next 18 months, it expects the addition of First Republic Bank to increase its net income by $500 million annually.
