Regulators took control of First Republic Bank and sold it to JPMorgan Chase on Monday, a dramatic move aimed at stemming a two-month banking crisis that has rocked the financial system.
The First Republic, whose assets have been battered by rising interest rates, had struggled to stay alive after two more lenders went bankrupt last month, spooking depositors and investors.
First Republic was taken over by the Federal Deposit Insurance Corporation and immediately sold to JPMorgan. The deal was announced hours before U.S. markets opened and after a scramble from officials over the weekend.
Later Monday, 84 First Republic branches in eight states will reopen as branches of JPMorgan.
JPMorgan “will assume all deposits and substantially all of the assets of First Republic Bank,” the FDIC said in a statement. The regulator has estimated that its insurance fund would have to pay out around $13 billion to cover losses to the First Republic.
“Our government called on us and others to step in, and we did,” said Jamie Dimon, chief executive of JPMorgan. He said the transaction was “to minimize costs to the Deposit Insurance Fund”.
The First Republic failed although it received a $30 billion lifeline from 11 of the country’s largest banks in March. It will go down in history as the second largest US bank by assets to collapse after Washington Mutual, which failed in the 2008 financial crisis.
The government takeover and sale of the First Republic comes seven weeks after the government took control of Bank of Silicon Valley And Signature Bankwhose bankruptcies have sent shockwaves through the sector and raised fears that other regional banks are at risk of similar deposit runs.
Many banking experts said the First Republic’s troubles were a delayed reaction to the March turmoil rather than the start of a new phase of the crisis. Investors and industry executives are optimistic that no other medium-sized or large lenders face imminent bankruptcy. While shares of First Republic plunged again last week, other bank stocks barely budged.
Even so, the US financial system has many problems. Recent bank failures and rising interest rates have forced banks to limit their lending, making it harder for businesses to expand and for individuals to buy homes and cars. This is one of the reasons why the economy has slowed in recent months.
The $30 billion cash injection helped ease broader fears about the banking system, but did not allay concerns about the viability of the First Republic. The lender, founded in 1985, was the 14th largest bank in the United States at the start of this year. Its shares lost nearly all of their value after a relentless series of steep declines that began as Silicon Valley Bank faltered.
The end of the First Republic came after weeks during which the bank and its advisers sought to either save the bank or find a buyer outside of a government takeover. But the efforts fell flat: other banks were reluctant to buy it or pieces of the bank without assurances that they wouldn’t end up with billions of dollars in losses. Last week, after an alarming earnings report in which the bank revealed that customers had withdrawn more than half of its deposits, it became clear there was no other option apart from government takeover.
Late last week, the FDIC contacted other financial institutions, including JPMorgan Chase, PNC Financial Services and Bank of America, seeking offers for the First Republic. Bidders had until noon Sunday to submit their bids. As part of the bidding process, banks were also asked about which parts of the bank they would not accept.
Like the other two bankrupt banks – Silicon Valley Bank and Signature – First Republic crumbled under the weight of loans and investments that lost billions of dollars as the Federal Reserve rapidly raised interest rates to fight back. against inflation. When it became clear that those assets were now worth much less, First Republic’s wealthy customers, most of whom live on the coasts, began withdrawing their money as quickly as they could and investors dumped its shares.
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 at the end of 2022. It also said it had borrowed $92 billion, mostly from the Fed and groups government-backed lending programs, effectively acknowledging that it had to turn to the financial sector’s lenders of last resort to keep the doors open.
The bank’s dismal financial statements only stoked investors’ worst fears – that the Federal Deposit Insurance Corporation would have to take over the bank.
By Thursday night, the First Republic and its advisers knew there were no more options outside of a government takeover. The FDIC worked with financial advisory firm Guggenheim Partners on the process, according to three people with knowledge of the situation.
Federal regulators are in defense mode. Last week the Fed and the FDIC published reports blaming themselves for failing to properly regulate Silicon Valley Bank and Signature. The reports also blamed the banks for their mismanagement and excessive risk-taking.
First Republic had many clients in the start-up industry – such as Silicon Valley Bank – and in the financial sector, including senior bankers and hedge fund managers. Many of his accounts held more than $250,000, the federal deposit insurance limit.
The collapse of the First Republic could add to fears of an economic slowdown. The upheaval that began with the failure of Silicon Valley Bank has made banks and investors more cautious, according to industry experts and economists. And that caution could make lending more difficult and expensive, hampering business expansion and hiring. The seizure of the First Republic and its aftermath could encourage the Fed to slow or pause interest rate hikes if it believes failure will prompt banks to tighten lending further.
Because of the types of customers it served, many of whom were multi-millionaires, the bank’s executives often talked about the security of its business model and its growth. Although its customer base has little history of defaults, the bank took out mortgages when interest rates were very low and kept them on its books rather than selling them to investors. The First Republic’s great hoard of home loans has fallen in value every time mortgage rates on new loans have climbed over the past year.
Other regional lenders, such as Utah’s Zions Bank and Los Angeles’ PacWest, have strengthened their positions faster than First Republic, and banking analysts do not see another meltdown imminent. Shares of all other banks in the S&P 500 stock index pink on friday even though shares of First Republic ended the day down more than 40% in anticipation of the government takeover.
This is a developing story. Check back for updates.
Rob Copeland contributed report.