Regulators seized control of First Republic Bank and sold it to JPMorgan Chase on Monday, a dramatic move to curb a two-month banking crisis that has rocked the financial system.
First Republic, whose assets were battered by the rise in interest rates, struggled to stay afloat after two other lenders collapsed last month, shocking savers and investors.
First Republic was acquired by the Federal Deposit Insurance Corporation and immediately sold to JPMorgan. The deal was announced hours before US markets were due to open, and after a battle by officials over the weekend.
Later Monday, 84 First Republic branches in eight states will reopen as JPMorgan branches.
JPMorgan will “acquire all of First Republic Bank’s deposits and substantially all of its assets,” the FDIC said in a statement. The regulator estimated that its insurance fund would need to pay out about $13 billion to cover First Republic’s losses.
“Our government invited us and others to step forward, and we did,” said Jamie Dimon, CEO of JPMorgan. He said the transaction was intended “to minimize costs to the Deposit Insurance Fund”.
The acquisition makes JPMorgan, already the nation’s largest bank, even bigger and could gain political scrutiny from Washington’s progressive Democrats.
First Republic failed despite receiving a $30 billion lifeline from 11 of the nation’s largest banks in March. It will go down in history as the second largest U.S. bank by assets to fail, after Washington Mutual, which failed during the 2008 financial crisis.
The government’s acquisition and sale of First Republic comes seven weeks after the government seized control of Silicon Valley Bank and Signature Bank, whose bankruptcies sent shockwaves through the industry and raised fears that other regional banks risked similar runs on deposits.
Many banking experts said First Republic’s trials were a delayed response to the March turmoil rather than the start of a new phase in the crisis. Investors and industry executives are optimistic that no other medium or large lender is at risk of bankruptcy. While shares of First Republic plummeted again last week, other bank stocks barely budged.
Yet the US financial system has enough problems. Recent bank failures and rising interest rates have forced banks to curb lending, making it harder for businesses to expand and for individuals to buy homes and cars. That is one of the reasons the economy has slowed in recent months.
Shares of JPMorgan rose about 3 percent in premarket trading as the S&P 500 poised for a flat open.
The $30 billion cash infusion helped allay broader fears about the banking system, but it didn’t allay concerns about First Republic’s viability. Founded in 1985, the lender was the 14th largest bank in the United States at the start of the year. The shares lost almost all of their value after a relentless series of steep declines that began when Silicon Valley Bank faltered.
The end of First Republic came after weeks in which the bank and its advisers tried to bail it out or find a buyer outside of a government takeover. But the efforts failed: Other banks were reluctant to buy it or parts of the bank without a guarantee that they wouldn’t end up with billions of dollars in losses. Last week, after an alarming earnings report in which the bank announced that customers had withdrawn more than half of its deposits, it became clear that there was no option but a government takeover.
Late last week, the FDIC reached out to other financial institutions, including JPMorgan Chase, PNC Financial Services and Bank of America, seeking bids for the First Republic. Bidders had until noon on Sunday to submit their bids. As part of the bidding process, banks were also asked which parts of the bank they would not accept.
Like the other two failed banks – Silicon Valley Bank and Signature – First Republic collapsed under the weight of loans and investments that lost billions of dollars in value as the Federal Reserve quickly raised interest rates to fight inflation. When it became clear that those assets were now worth much less, First Republic’s wealthy clients, most of whom live on the coast, began to raise their money as quickly as possible and investors dumped its stock.
Last Monday, First Republic revealed that customers had withdrawn $102 billion in deposits in the first three months of the year — well over half of the $176 billion it held by the end of 2022. It also said it had borrowed $92 billion, mostly from the Fed and government-backed lending groups, effectively acknowledging that it had to turn to financial industry lenders of last resort to keep its doors open.
The bank’s stark financial statement only fueled investors’ worst fear: that the FDIC would have to take over the bank.
As of Thursday night, First Republic and its advisers were aware that there were no options beyond a government takeover. The FDIC worked with financial advisory firm Guggenheim Partners on the process, three experts said.
Federal regulators are on defense mode. Last week, the Fed and FDIC released reports criticizing themselves for not adequately regulating Silicon Valley Bank and Signature. The reports also blamed the banks for poor management and excessive risk-taking.
First Republic had many clients in the start-up sector – similar to Silicon Valley Bank – and in the financial sector, including senior bankers and hedge fund managers. Many of his accounts contain more than $250,000, the federal deposit insurance limit.
The collapse of the First Republic could increase concerns about an economic slowdown. The turmoil that began with the bankruptcy of Silicon Valley Bank has made banks and investors more cautious, industry experts and economists say. And that caution could make borrowing more difficult and costly, hindering business expansion and hiring. The First Republic seizure and its aftermath could prompt the Fed to slow or pause its rate hikes if it believes the failure will prompt banks to tighten lending further.
Because of the type of clients it served — many of them multimillionaires — the bank’s executives often spoke of the safety of its business model and its growth. The customer base experienced few defaults, but the bank underwrote mortgages when interest rates were very low and kept them on its books rather than selling them to investors. First Republic’s vast hoard of home loans lost value every time mortgage rates on new loans rose over the past year.
Other regional lenders, such as Zions Bank in Utah and PacWest in Los Angeles, have gained a foothold faster than First Republic, and banking analysts don’t see another collapse imminent. Shares of every other bank in the S&P 500 stock index rose Friday, even as shares of First Republic fell more than 40 percent for the day in anticipation of the government takeover.
Robert Copeland reporting contributed.
