May 1 (Portal) – Regulators seized First Republic Bank (FRC.N) and sold its assets to JPMorgan Chase & Co (JPM.N) on Monday in a bid to file for the largest US bank failure since the 2008 financial crisis resolve and draw a line under an ongoing banking turmoil.
First Republic was among US regional lenders hardest hit by a crisis of banking confidence in March, as depositors fled en masse from smaller banks to giants like JPMorgan amid panics over the collapse of two other mid-sized US banks.
The bank has languished since then, but investors fled again last week as it announced more than $100 billion in outflows in the first quarter and a plan to explore new options.
Barely a week later, California regulators Monday seized the First Republic and placed it under FDIC receivership along with the sale of its assets, marking the third major U.S. bank failure in two months and the largest since Washington Mutual in 2008 .
JPMorgan shares rose 2% on Monday while mid-market banks fell and the KBW Regional Banking Index (.KRX) closed down 2.7%. First Republic shareholders will be wiped out in the transaction, Wedbush analysts said. Shares of the bank fell 43.3% in premarket trading on Monday before being halted.
As part of the transaction, JPMorgan will pay US Federal Deposit Insurance Corp (FDIC) $10.6 billion to take control of most of the San Francisco-based bank’s assets and gain access to First Republic’s coveted affluent customer base receive.
“Our government called on us and others to get involved, and we did,” said Jamie Dimon, JPMorgan chairman and CEO, who also played a key role in the 2008 financial crisis, buying Bear Stearns in a weekend bailout.
The deal will cost the FDIC’s deposit insurance fund about $13 billion, according to the regulator’s initial estimates.
US President Joe Biden on Monday welcomed the agreement to protect depositors without asking taxpayers to pay. He reiterated his call for stronger banking regulation and supervision.
“These actions will ensure that the banking system is safe and sound,” Biden said at a White House event. “Critically, taxpayers are not the ones on the hook.”
The White House hailed “firm” action by regulators to protect depositors and stabilize the banking system. White House press secretary Karine Jean-Pierre said the measures would also ensure the First Republic, which she said was “seriously mismanaged,” would be held accountable.
TOO BIG TO FAIL?
Analysts and industry executives said the deal, which was completed over the weekend after the FDIC conducted an auction process that saw several other banks bidding, should calm markets. But they added that this comes at a cost: the biggest banks are getting stronger, while smaller banks are finding it increasingly difficult to do business.
[1/3] People walk past a branch of First Republic Bank in San Francisco, California, U.S. April 28, 2023. Portal/Loren Elliott/File Photo
Dennis Kelleher, CEO of Wall Street reform group Better Markets, said the auction result showed “unhealthy consolidation, unfair competition, a dangerous proliferation of too-big-to-fail banks — all while it’s community banking , small business lending and the economy hurt growth.”
JPMorgan already holds more than 10% of the country’s total bank deposits. Wells Fargo said in a research note that JPM’s net deposits would increase 3% as a result of the transaction.
“We need big, successful banks in the largest economy in the world,” Dimon told reporters on a conference call. “We have the capacity to serve our customers, which can be cities, schools, hospitals and governments. We are banks of the IMF, the World Bank. And anyone who thinks the United States shouldn’t have that can call me directly.”
Jane Fraser, CEO of rival Citigroup, hailed the deal as resolving the last major source of uncertainty for the sector after a period of turbulence.
“Let’s not taint all regional and small banks with an enormous problem,” Fraser told a conference.
“This is not the global financial crisis, this is not the savings and credit crisis. There will be stress, but let’s attack where it is.”
RISING RATES
Global banking was rocked by the shutdowns of Silicon Valley Bank and Signature Bank in March, as US lenders’ deposit flight forced the Fed to take emergency measures to stabilize markets, while Switzerland’s Credit Suisse (CSGN.S) Competitor UBS (UBSG.S) had to be rescued. These failures occurred after crypto-focused Silvergate went into voluntary liquidation.
Some traced the root cause of the banking sector crisis to years of ultra-loose monetary policy, followed by an abrupt reversal and rapid rate hikes by the US Federal Reserve last year.
“When it was just SVB, it was easy to blame management. Now that we’re seeing the pattern, it’s obvious that the Fed went too far, too fast, and broke things,” said Thomas J Hayes, Chairman and Executive Member, Great Hill Capital.
JPMorgan was one of several interested buyers, including PNC Financial Services Group (PNC.N) and Citizens Financial Group Inc (CFG.N), who submitted final bids in an auction held by U.S. regulators on Sunday, sources familiar with the matter said .
JPMorgan has assumed all of the bank’s deposits, it said, and will repay $25 billion from $30 billion banks that were deposited with First Republic in March to prop them up.
The failed bank’s 84 offices in eight states will reopen as branches of JPMorgan Chase Bank starting Monday, she added.
Reporting by Saeed Azhar, Nupur Anand and Tatiana Bautzer in New York; Edited by Stephen Coates and Kirsten Donovan
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