On Monday, JPMorgan Chase will acquire all insured deposits and assets of San Francisco-based bank which served affluent customers with assets frequently surpassing FDIC's $250,000 deposit insurance limit.
Investors and depositors were concerned that Silicon Valley Bank could follow in the footsteps of Silicon Valley Bank and Signature Bank when both went under in March.
Job Cuts and What’s the Aftermath?
As investors digested news of First Republic Bank being taken over and acquired by JPMorgan Chase, its employees may have anticipated layoffs. First Republic is now the third midsize bank to fail within two months after Silicon Valley Bank and Signature Bank of New York both failed. JPMorgan's acquisition marks its second-largest failure since 2008 financial crisis.
Following an unsuccessful weekend of attempts to sell First Republic, JPMorgan took swift action on Monday morning by seizing all deposits and assets from First Republic. JPMorgan is taking over all $92 billion deposits held with First Republic as well as most loans (about 173 billion), 30 billion securities holdings (roughly 30 billion of each), $173 billion loans and $30 billion securities (worth $30 billion total). Meanwhile, Federal Deposit Insurance Corporation will incur an approximate $13 billion loss.
First Republic Bank was one of the many banks affected by the financial crisis that were unable to regain stability during and since it predominantly served wealthy clients in venture capital and did not offer low-interest mortgages to attract lower income customers like Silicon Valley Bank did. As a result, its issues were particularly acute.
After SVB and Signature Bank collapsed, First Republic saw many accounts fall below the $250,000 FDIC-insured limit, leaving it vulnerable to an outright run on deposits similar to what took place there. Its deposits fell precipitously so quickly that rescue was required immediately.
Even with their best efforts at finding a private solution, it became evident on Friday that government takeover was inevitable when shares of the privately held bank declined by 65-75% according to reports in The Financial Times (FT).
The Financial Times (FT) reported that bank advisors were working on a plan to prevent the government from seizing it, though their efforts may have fallen short of being enough. If no private plans can be found to rescue it, the FDIC will have to decide whether to invoke systemic risk exception and protect larger deposits within this bank, similar to what it did at SVB and SBNY.
The Bank’s Board of Directors
First Republic's seizure is yet another indication that our banking system remains vulnerable to panic, as evidenced by Silicon Valley Bank's collapse last month. Furthermore, First Republic's issues raise alarm about its health as an investment vehicle that supports startups and technology companies essential to economic development.
The FDIC announced it would impose "stricter risk-based capital standards" on First Republic and other large banks, potentially forcing them to raise billions in new capital or reduce investments. JPMorgan already faces such standards from this regulator.
Investors were anticipating layoffs at their bank that could reach 20-25%. To help reduce borrowings and deposits while cutting costs, the company announced it will offer employees severance packages based on years of service as well as assistance in finding new employment - including legal advice to those on work visas. It also plans to focus on reducing borrowings and deposits as well as cutting costs.
First Republic Bank was one of many midsize regional banks with assets exceeding $250 billion; however, its deposits weren't quite on par with those held by SVB and Signature Bank, but still boasted many affluent customers with accounts exceeding the $250,000 FDIC insured limit.
Due to SVB's collapse causing a deposit run, First Republic lost about $100 billion in deposits, prompting it to borrow heavily from the Federal Reserve's discount-window facility and increase its cost of funds further as interest rate hikes reduced their holdings of bonds and loans on its books.
JPMorgan joined 10 other large banks to deposit $30 billion into First Republic in March as part of an industry effort to rescue it; unfortunately, however, this wasn't sufficient and regulators stepped in.
Investors were concerned that a government takeover of the bank might trigger withdrawals that would harm both consumers and other banks. As a result, the FDIC is running an auction to sell it; the winning bidder will assume most losses from failure and pay most losses from seizure. Deregulation has increased the chances that poorly supervised banks may be purchased by larger ones at taxpayer expense - thus forcing government intervention when that occurs.
The FDIC
The FDIC is taking steps to seize First Republic Bank, ending its turmoil following Silicon Valley Bank's collapse in March. An FDIC official noted that taking over First Republic will cost at least $13 billion; consumers may bear some of this cost as well.
The agency may establish a bridge bank to take over First Republic's assets and liabilities. Or it could sell or pledge its assets to another financial firm. Initially, First Republic had hoped to reach an agreement before government took control, but that remains uncertain.
JPMorgan emerged victorious after high-stakes talks spanning an entire weekend, which were considered competitive enough to minimize damage to the Federal Deposit Insurance Corporation's insurance fund while at the same time impacting First Republic shareholders and bondholders who face losses on their investments.
First Republic's failure is also indicative of ongoing concerns over the U.S. banking system, which has struggled to adjust to an influx of deposits moving out in search of higher returns. First Republic was the third major bank failure since March.
First Republic was a private bank serving wealthy clients with approximately $102 billion in assets. Based in California and catering mainly to coastal Americans with low-rate mortgages and other services, its stock price quickly plummeted after SVB collapsed and customers started withdrawing deposits from it.
Federal regulators had serious reservations about First Republic's size and concentration of deposits. Their seizure by JPMorgan could prompt renewed calls for reform at the Federal Reserve, OCC and FDIC.
Progressive Democrats were dismayed at the thought of JPMorgan taking over First Republic, given it would make the company even larger than before. One person familiar with the situation speculated that this factor likely tilted in favor of PNC; smaller regional banks also showed interest.
JPMorgan Chase
JPMorgan Chase & Co agreed on Monday to purchase First Republic Bank, the California lender seized by regulators earlier this month in an effort to end a banking crisis that has shaken industry. The deal allows depositors at First Republic to keep their money, and will end a massive run-off that saw its closure forced due to investors moving their funds out for better returns elsewhere.
JPMorgan will pay about $229 billion for San Francisco-based bank TD Cowen, including assets and deposits, which analysts at TD Cowen project will cost the Federal Deposit Insurance Fund an expected loss of roughly $13 billion compared to IndyMac's massive failure in 2008 that cost the FDIC $20 billion in losses - one of the greatest financial disasters ever experienced by our nation.
This agreement is expected to be "modestly EPS accretive", producing $500 million annually in incremental net income after any post-tax gain or restructuring costs are considered. This purchase involves the acquisition of First Republic's 84 branches with franchise agreements, deposits and $92 billion assets.
Depositors at First Republic should expect full repayment of uninsured deposits transferred over to Chase as part of this deal, an essential provision to prevent a repeat of what occurred back in March when federal officials invoked law to back $30 billion worth of deposits at Silicon Valley Bank and Signature Bank, both of which ultimately failed.
Investors and depositors were uneasy about First Republic's future following two banks collapsing quickly due to runs by wealthy customers. A number of large financial institutions attempted to give those institutions more time by pooling deposits in an attempt to calm panic, but this failed in First Republic's case, leading it to be taken over by the Federal Deposit Insurance Corp.
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