The financial industry has been rocked by the recent collapse of several large banks, and regulators are working hard to prevent a repeat of the 2008 financial crisis.
One of the most recent incidents involved the seizure of First Republic Bank, a San Francisco-based bank with over $233 billion in assets at the end of the first quarter.
Following the collapse of Silicon Valley Bank, First Republic lost $100 billion in deposits, causing regulators to step in and sell the bulk of its operations to JPMorgan Chase & Co. This move was made to prevent a chaotic collapse that could have threatened the stability of the financial system.
As part of the deal, JPMorgan will assume all of First Republic’s $92 billion in deposits, both insured and uninsured. The bank will also purchase most of First Republic’s assets, including $173 billion in loans and $30 billion in securities.
To mitigate the risks involved in this transaction, the Federal Deposit Insurance Corp. (FDIC) will share losses with JPMorgan on First Republic’s loans. The agency estimates that its insurance fund will take a hit of $13 billion as a result of this deal. To help JPMorgan finance this acquisition, the FDIC will provide the bank with $50 billion in financing.
JPMorgan’s involvement in this transaction is significant, as the bank has a history of stepping in during banking crises. In fact, JPMorgan CEO Jamie Dimon played a pivotal role in earlier efforts to rescue First Republic.
In a statement, Dimon said, “Our government invited us and others to step up, and we did.” JPMorgan’s acquisition of First Republic’s assets is expected to help stabilize the financial industry and prevent a repeat of the 2008 crisis.
The recent spate of bank failures has raised concerns about the stability of the financial system. In addition to First Republic and Silicon Valley Bank, two other large banks have failed in the past two months: Signature Bank, a New York-based lender, and Washington Mutual Inc., which collapsed in 2008.
JPMorgan now substantially owns both First Republic and Washington Mutual, which further solidifies the bank’s position as the largest in the nation.
Regulators took over First Republic Bank and reached an agreement to sell most of its operations to JPMorgan Chase & Co., preventing a chaotic collapse that could have sparked another banking crisis.
JPMorgan is going to acquire all of First Republic’s deposits, both insured and uninsured, and buy a majority of the bank’s assets, which include loans worth around $173 billion and securities worth $30 billion.
The deal includes an arrangement with the FDIC where the agency will take on a portion of losses incurred by JPMorgan on First Republic’s loans. The FDIC estimates that its insurance fund will lose $13 billion as a result of this transaction. Additionally, JPMorgan will receive $50 billion in financing from the FDIC.
First Republic’s collapse was triggered by a mass exodus of depositors, who used their smartphones to withdraw large uninsured balances. However, the bank’s problems were rooted in a wrong-way bet on interest rates.
The bank’s focus on America’s coastal elite enabled it to become one of the most valuable U.S. banking franchises. First Republic relied heavily on big deposits from customers with lots of cash to fund low-rate jumbo mortgages for wealthy homebuyers.
Ultra-low interest rates and a pandemic savings boom accelerated the bank’s growth, but when the Federal Reserve began raising interest rates last year to cool inflation, customers demanded higher yields to keep their money at First Republic. Rising rates also decreased the value of loans the bank made when rates were near zero.
This chronic problem became acute in March, when Silicon Valley Bank collapsed, causing investors and customers to worry about banks that relied heavily on uninsured deposits and had large unrealized losses in their loan and securities portfolios due to rising rates.
First Republic’s badly damaged balance sheet left it with few options, and it ultimately failed. However, this is not the story of 2008, where one bank’s failure sparked fears about the stability of the entire banking system.
The failure of First Republic is not likely to lead to another crisis of confidence in Main Street lenders, according to Steven Kelly, a senior researcher at the Yale Program on Financial Stability. The collapse of First Republic is seen as the last stages of an initial panic, caused by the collapse of Silicon Valley Bank and Signature Bank.
First Republic recently released a quarterly earnings report that revealed the extent of the bank’s deposit run. To fill the hole on its balance sheet, the bank had to resort to expensive loans from the Federal Reserve and Federal Home Loan Bank.
The situation looked bleak as the bank was on track to earn less on its loans than it paid on liabilities. This led to a nearly 50% drop in First Republic’s stock price in one day, with shares closing at $3.51, down from $115 the day before Silicon Valley Bank’s collapse.
The aftermath of the deposit run caused some employees to leave the bank. The wealth-management division, which had received significant investment, saw a loss of around 10% of its key staff. Those who stayed behind watched anxiously as the bank’s stock price continued to plummet. Many employees felt that management had not provided sufficient communication about the bank’s future.
The business climate also changed dramatically after the deposit run. Previously, First Republic bankers had focused on attracting deposits, but now they found themselves unable to prevent customers from pulling out their cash. Additionally, banker pay was linked to the amount of customer deposits brought into the bank, so their compensation also took a hit.
CEO Michael Roffler and Executive Chairman Jim Herbert sent out emails to thank First Republic employees for their continued hard work during the turbulent times. They emphasized the bank’s history of serving its clients, supporting its communities, and taking care of its employees, and stated that this would continue in the coming weeks.
The timeline of events leading up to the merger of First Republic Bank with JPMorgan:
- March 2023: The collapse of Silicon Valley Bank triggers a panic among depositors of First Republic Bank, which had been heavily relying on uninsured deposits to fund its lending activities.
- April 2, 2023: First Republic Bank discloses a $100 billion deposit run in its Q1 earnings report, leading to a nearly 50% drop in its stock price.
- April 9, 2023: First Republic Bank fills the hole in its balance sheet with expensive loans from the Federal Reserve and Federal Home Loan Bank.
- April 16, 2023: First Republic Bank loses around 10% of key staffers in its wealth-management division.
- April 22, 2023: First Republic Bank announces its intention to explore strategic alternatives, including a possible merger or sale.
- April 27, 2023: JPMorgan expresses interest in acquiring First Republic Bank, leading to negotiations between the two parties.
- April 29, 2023: JPMorgan offers to acquire First Republic Bank for $70 per share, valuing the company at around $11 billion.
- April 30, 2023: First Republic Bank’s board of directors approves the merger agreement with JPMorgan.
- May 1, 2023: First Republic Bank’s 84 branches reopen as part of JPMorgan during normal business hours, and customers have full access to their deposits.
First Republic, based in San Francisco, was the second-largest bank to fail in U.S. history, with assets of around $233 billion at the end of the first quarter.
The bank lost $100 billion in deposits in March after the collapse of Silicon Valley Bank, and it struggled to survive despite receiving a $30 billion deposit from a group of the country’s largest banks. JPMorgan CEO Jamie Dimon was instrumental in earlier efforts to rescue First Republic, and the bank has a history of stepping in during banking crises.
As part of the deal, JPMorgan will reopen First Republic’s 84 branches during normal business hours on Monday, and customers will have full access to their deposits, according to the FDIC.
While the failure of First Republic caused significant concern among investors and customers, it is unlikely to trigger another crisis of confidence in Main Street lenders, which serve a large chunk of American businesses and consumers. Regional lenders saw modest declines in deposits during the first quarter, but these were much smaller than First Republic’s outflow of $100 billion.
