First Republic Financial institution fails, taken over by JPMorgan

This illustrative photo shows a smartphone screen with the First Republic Bank logo and a screen with the JP Morgan Chase logo in the background in Washington, DC on May 1, 2023.

Olivier Douliery | AFP | Getty Images

taken over by regulators First Republic on Monday, leading to the third bankruptcy of a US bank since March after a last-ditch effort to persuade competing lenders to keep the struggling bank afloat failed.

JPMorgan Chase, already the largest US bank by several measures, emerged as the winner of the weekend auction for First Republic. She will receive all of the struggling bank’s deposits and a “substantial majority of the assets,” the New York-based bank said.

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The First Republic seizure led to the largest bank failure since the 2008 financial crisis when Washington Mutual collapsed. Back then, it was also JPMorgan that emerged with the assets of the failed banks.

Since the sudden collapse of Silicon Valley Bank in March, attention has focused on First Republic as the weakest link in the US banking system. Like SVB, which catered to the tech startup community, First Republic was also a type of specialty lender based in California. It focused on catering to wealthy coastal Americans, luring them with low mortgages to keep cash in the bank.

However, that model unraveled after the collapse of SVB, when First Republic’s customers withdrew more than $100 billion in deposits, the bank revealed in its April 24 earnings report. Institutions with high proportions of uninsured deposits, such as SVB and First Republic, found themselves vulnerable again as customers feared losing their savings in a bank run.

First Republic shares were down 97% by the close on Friday.

JPMorgan will receive about $92 billion in deposits as part of the deal, including the $30 billion it and other big banks invested in First Republic last month. The bank has loans worth $173 billion and securities worth $30 billion.

The Federal Deposit Insurance Corporation agreed to share losses on mortgage and commercial loans assumed by JPMorgan in the transaction and also provided it with a $50 billion line of credit.

JPMorgan said it would make a $10.6 billion payment to the FDIC.

Hit $13 billion

The weekend auction, which attracted bids from JPMorgan Chase and PNC as well as interest from other banks, was a “hard-fought bidding process,” according to the FDIC.

The transaction will cost the FDIC’s deposit insurance fund an estimated $13 billion, according to regulators. For comparison, the SVB process cost the fund around $20 billion.

California’s Department of Financial Protection and Innovation said Monday it took possession of First Republic and appointed the FDIC as receiver. The FDIC accepted JPMorgan’s bid for the bank’s assets.

“As part of the transaction, First Republic Bank’s 84 offices in eight states will reopen today during normal business hours as branches of JPMorgan Chase Bank, National Association,” the FDIC said in a statement. “All First Republic Bank depositors will become JPMorgan Chase Bank, National Association depositors and have full access to all of their deposits.”

JPMorgan CEO Jamie Dimon announced the acquisition in a statement early Monday morning.

“Our government invited us and others to get involved and we did,” he said. “This acquisition provides modest overall benefit to our business, adds value to shareholders, helps further advance our wealth strategy and complements our existing business.”

After Monday morning’s takeover, the Treasury Department tried to reassure Americans about the country’s financial system.

“The banking system remains sound and resilient, and Americans should be confident in the safety of their deposits and the ability of the banking system to perform its essential function of lending to businesses and families,” a Treasury Department spokesman said.

weak link

First Republic’s deposit outflow in the first quarter forced the company to borrow heavily from Federal Reserve facilities to keep operations running, putting pressure on the company’s margins as its funding costs are now much higher. According to Doug Peta, chief strategist at BCA Research, First Republic recently accounted for 72% of all credit from the Fed’s discount window.

On April 24, First Republic CEO Michael Roffler attempted to paint a picture of stability following the events of March. Deposit outflows have slowed in recent weeks, he said. But stocks plummeted after the company scrapped its earlier financial guidance and Roffler opted not to ask questions after an unusually short conference call.

The bank’s advisers had hoped to persuade the largest US banks to help First Republic again. A recently circulated version of the plan involved requiring banks to pay above-average interest on bonds on First Republic’s balance sheet, which would allow it to raise capital from other sources.

But ultimately, the banks, which joined forces in March to pump $30 billion in deposits into the First Republic, couldn’t agree on the bailout plan, and regulators stepped in, ending the bank’s 38-year run.