Regulators seized control of First Republic Bank and sold it to JPMorgan Chase on Monday, a dramatic move aimed at stemming a two-month banking crisis.
First Republic is the second largest US bank by assets to collapse after Washington Mutual, which failed during the 2008 financial crisis and was acquired by JP Morgan.
Founded in 1985 and the 14th largest U.S. bank earlier this year, First Republic’s assets have been hit by rising interest rates, and the company has struggled to stay afloat after two other lenders collapsed in March, spooking depositors and investors.
The takeover of First Republic by the Federal Deposit Insurance Corp. and the sale to JPMorgan was announced hours before U.S. markets opened and after a scramble by officials over the weekend. On Monday, 84 First Republic branches in eight states reopened as JP Morgan branches.
“This part of the crisis is over” Jamie Dimon, JPMorgan’s chief executive, said in a conference call on Monday. “We should all take a deep breath for now.”
Investors welcomed JPMorgan’s takeover, with the bank’s shares up 3.5 percent on Monday. Shares of PNC Financial Services and Citizens Financial Group — two regional banks that lost bids for First Republic — each traded up more than 5 percent.
First Republic’s shareholders and debt holders will be wiped out in the deal, a common occurrence when a bank is placed into government receivership. The First Republic name and its logo — an eagle with wings in a V-shaped pattern — will be phased out, and the bank’s branches will become JPMorgan Chase outlets.
President Biden also hailed the acquisition during a speech on small business Monday afternoon. Mr. from the Rose Garden. “These measures will ensure the banking system remains safe and sound,” Biden said. He added: “While depositors are protected, shareholders lose their investments. Critically, taxpayers are not on the hook.”
The FDIC, whose insurance fund is made up of fees banks pay the agency to insure depositors, estimated that the First Republic would have to pay about $13 billion to cover its losses. JPMorgan said the FDIC would provide it with $50 billion in financing, and JPMorgan would pay $10.6 billion to the FDIC.
“Our government invited us and others to step up and we did,” Mr. Dimon said. He said the transaction was undertaken to “reduce the costs of the Deposit Insurance Fund”.
The acquisition makes JP Morgan, already the country’s largest bank, even bigger Criticized by some legislators. “Since the 2008 financial crisis, regulators have sought to prevent the largest banks from becoming dominant,” Ian Katz, an analyst at Capital Alpha Partners, wrote in a research note. JPMorgan’s size increase will “displease lawmakers on both sides of the aisle, but will especially please progressives who have fought against consolidation via M&A.”
First Republic failed despite securing a $30 billion lifeline from the nation’s 11 largest banks in March. JP Morgan said $30 billion Reimbursement will be made after completion of the contract.
The government’s takeover and sale of First Republic, about eight weeks after the government took control of Silicon Valley Bank and Signature Bank, sent shock waves through the industry and raised fears that other regional banks are at risk of similar runs on deposits.
Many banking experts said the First Republic’s woes were a delayed reaction to the turmoil in March rather than opening a new phase in the crisis. Investors and industry executives are optimistic that other medium-sized or large lenders will not face imminent failure.
Like two other failed banks — Silicon Valley Bank and Signature — First Republic collapsed under the weight of loans and investments that prompted the Federal Reserve to quickly raise interest rates to fight inflation. When it became clear that those properties were now worth much less, First Republic’s affluent customers, mostly along the coast, began pulling out their cash as quickly as they could, and investors dumped its stock.
“The cardinal sin of the FRC and SVB is that they grew too fast when interest rates were close to 0 percent,” wrote Timothy Coffey, banking analyst at Johnnie Montgomery Scott, in a research note about First Republic and Silicon Valley Bank. “There may be others. However, most banks have mastered picking pennies in front of a steamroller, so these are very limited entities.
Even so, the US financial system has many problems. Recent bank failures and rising interest rates have restricted banks from lending, making it harder for businesses to expand and individuals to buy homes and cars. This is one of the reasons why the economy has been sluggish for the past few months.
First Republic’s decision came weeks later, in which the bank and its advisers tried to find a buyer to save the bank or avoid a government takeover. But the efforts failed: other banks were reluctant to buy or slice it without guarantees that they wouldn’t lose billions of dollars. Last week, after the bank’s alarming earnings report revealed that customers had withdrawn more than half of its deposits, it became clear that there was no other option but a government takeover.
Late last week, the FDIC approached other financial institutions, including JPMorgan Chase, PNC Financial Services and Bank of America, to solicit bids for First Republic. Bidders were given till noon on Sunday to submit their offers. As part of the bidding process, banks were also asked what accommodations they expected from the government to move forward, people familiar with the process said.
The sale process was expected to be completed by Sunday evening, but the announcement took place at midnight. JP Morgan’s Mr. Dimon said 800 employees at the bank have been working under contract for the past several days.
The banking crisis has also put federal regulators on the defensive by exposing problems that analysts say should have forced banks to identify and fix them months ago. Last week the Fed and the FDIC issued statements criticizing Silicon Valley Bank and Signature for failing to adequately regulate them. The reports also blamed the banks for poor management and excessive risk-taking.
First Republic had many clients in the financial industry, including senior bankers and hedge fund managers — like Silicon Valley Bank. Many of its accounts held more than $250,000, the limit for federal deposit insurance.
The latest bank shutdown could keep the central bank on track to raise interest rates by a quarter point at Wednesday’s meeting, said Krishna Guha, head of Evercore ISI’s global policy and central bank strategy group. In fact, he said, taking on a lingering source of risk and uncertainty could “clear the decks” for such a move.
But Mr. Guha said banking problems are moving from “acute” to “chronic”: other lenders may look at First Republic and other recent bank failures and try to shore up their position by being more cautious about lending. .
“The macroeconomic effects of banking stress may only be in the early stages of unfolding,” said Mr. Guha said.
Rob Copeland And Jim Tankersley Contributed report.