First Republic Bank, the second-largest bank failure in US history, has been taken over by the Federal Deposit Insurance Corporation (FDIC) and sold to JPMorgan Chase, the largest bank in America. The deal was announced on Monday morning after First Republic reported losing about 40% of its deposits in the first quarter of this year.
First Republic Bank, which was founded in 1985 and catered to wealthy clients, had $229.1 billion in total assets and $103.9 billion in deposits at the time of closure. JPMorgan acquired all of First Republic’s deposits and a “substantial majority of assets” for an undisclosed amount. JPMorgan said it expected the deal to be “modestly accretive” to its earnings.
The bank failure is the third major one this year, following the collapses of Silicon Valley Bank and Signature Bank in March, which were also seized by the FDIC and sold to other lenders. It is also the largest one since the 2008 financial crisis when Washington Mutual was taken over by the FDIC and sold to JPMorgan for $1.9 billion.
The collapse of First Republic was triggered by a massive flight of deposits amid rising interest rates and growing fears of bank runs after the failures of Silicon Valley Bank and Signature Bank. Many of First Republic’s depositors had uninsured accounts that exceeded the FDIC’s $250,000 guarantee limit, making them vulnerable to losses in case of a bank failure. As a result, they moved their money to safer and more attractive banks.
First Republic also suffered from a mismatch between its assets and liabilities. Many of its loans had fixed, long-term interest rates that lost value as the Federal Reserve hiked its benchmark rate several times this year. The bank also had a large exposure to commercial real estate loans, which have been hit hard by the pandemic and the shift to remote work.
First Republic had tried to find a buyer or raise more capital to shore up its balance sheet, but it failed to secure a deal before it ran out of liquidity. The bank said last week that it was “engaged in discussions with multiple parties about our strategic options while continuing to serve our clients”. But it was too late to save the bank from collapse.
The FDIC said that no depositor would lose any money as a result of the takeover and sale of First Republic. It also said that the cost to its Deposit Insurance Fund would be $7.6 billion1. The FDIC insures deposits at more than 5,000 banks and thrifts with more than $13 trillion in assets.
The takeover and sale of First Republic is expected to have a minimal impact on JPMorgan’s operations and financial performance. JPMorgan is already one of the largest banks in the US, with $3.7 trillion in assets and $2.1 trillion in deposits as of March 31. The deal will expand its presence in California, where First Republic had most of its branches.
The collapse of First Republic raises questions about the health and stability of other regional banks that face similar challenges of deposit flight, interest rate risk, and loan quality. The Federal Reserve and other regulators have been closely monitoring the situation and providing liquidity support to banks in need. However, some analysts warn that more bank failures could occur if economic conditions worsen or if confidence in the banking system erodes further.
