May 22, 2024

Regulatory Intervention Aids JPMorgan’s Acquisition of Ailing First Republic Bank, with Government Sharing Losses and Offering $50 Billion Financing

Regulators have intervened to prevent the disorderly collapse of First Republic Bank by taking control and arranging a deal for JPMorgan Chase & Co. to acquire the majority of its operations. The acquisition includes $92 billion in deposits and around $173 billion in loans. The Federal Deposit Insurance Corp. (FDIC) will share losses with JPMorgan on First Republic’s loans and provide $50 billion in financing.

First Republic Bank, based in San Francisco, is the second-largest bank failure in U.S. history. It suffered a loss of $100 billion in deposits after the collapse of Silicon Valley Bank in March. Despite efforts from a group of major U.S. banks to rescue First Republic with a $30 billion deposit, the bank continued to struggle.

Three of the four largest U.S. bank failures have occurred within the last two months, including First Republic, Silicon Valley Bank, and Signature Bank. JPMorgan now owns significant portions of both First Republic and Washington Mutual, having intervened during banking crises in the past.

First Republic’s 84 branches will reopen as part of JPMorgan, and customers will have full access to their deposits. While the bank’s failure is unlikely to trigger another crisis of confidence in Main Street lenders, it highlights the precarious situation in the banking industry.

The collapse of First Republic can be attributed to panicked depositors withdrawing large uninsured balances, as well as the bank’s misguided bet on interest rates. The bank’s focus on wealthy clients helped it grow, but when the Fed raised interest rates to combat inflation, customers demanded higher yields, and the value of the bank’s loans decreased.

First Republic’s collapse followed the failure of Silicon Valley Bank, sparking fears about hidden risks within the banking system. These concerns were particularly focused on banks that relied heavily on uninsured deposits and experienced large unrealized losses in their loan and securities portfolios due to rising rates.

Following a dismal quarterly earnings report, First Republic’s stock plummeted nearly 50% in one day. The bank was left with a severely damaged balance sheet and few viable options for recovery. As a result, some employees left the bank, and those who remained worried about its future.

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