JPMorgan Chase acquired First Republic Bank’s deposits and major assets after the bank failed, becoming the second large regional bank with assets exceeding $200 billion to collapse in a matter of weeks. First Republic, similar to Silicon Valley Bank, catered mainly to wealthy clients who helped the bank grow its deposits at an astonishing rate. The bank’s sudden exposure and vulnerability to a rise in interest rates led to its downfall, which contributed to growing customer concerns after several withdrawals followed the collapse of Signature Bank and Silicon Valley Bank.
Deposits worth more than $100 billion were withdrawn within a few days in mid-March, and a considerable portion of the bank’s accounts contained deposits much higher than the federally-insured level of $250,000. Primarily focusing on large loans, including jumbo mortgages, First Republic banked on historically low-interest rates hoping to encourage customers to expand into more profitable products like wealth management. However, when the Federal Reserve raised interest rates, the value of the large loans plummeted, and the bank decided to sell off assets that generated low returns for its wealthy clients.
Remedial action, like layoffs to about a quarter of its workforce, totaling about 7,200 personnel and selling off troubled assets including the low-interest mortgages for wealthy clients, proved to be too little too late, leading to government intervention. Treasury officials bid for the bank after government action was deemed necessary. Other midsize banks suffered massive withdrawals and had to borrow from government programs to steady their balance sheets, but no bank faced the same level of difficulty as First Republic, and thus, expectations are that the banking system will be spared any more large bank failures.
Shares of most midsize banks fell on Monday, but the declines were significantly less in comparison to the steep double-digit losses experienced after Silicon Valley Bank’s failure. The seizure of First Republic resulted in minimal spillovers, bringing the notion that there was no surprise to the fore. JPMorgan Chase stressed that it is not assuming First Republic’s corporate debt or preferred stocks.
After trading at $115 a share on March 8th, shares of First Republic dropped to $3.15 last Friday, wiping out $20 billion in market value. Bondholders and stockholders are paid after depositors, thus JPMorgan Chase urged customers to keep their money with the bank. Although the FDIC does not predict the probability of investors being repaid, its deposit insurance fund could suffer an estimated $13 billion loss as a consequence of First Republic’s failure, providing investors with negligible hopes of recouping their investments.
During a Rose Garden event focused on small businesses, when asked about the bank seizure, President Joe Biden stated that depositors are protected, though shareholders are losing their investments, and most importantly, taxpayers will not be liable.
