JPMorgan Chase is to acquire most of First Republic after US regulators orchestrated an overnight deal to shut the embattled California lender, wiping out its shareholders in the second-biggest bank failure in the country’s history.
The Federal Deposit Insurance Corporation and California regulators, which announced the deal early on Monday morning, said they were simultaneously closing the bank and selling off all $93.5bn of its deposits and most of its assets to JPMorgan.
The Wall Street bank is paying the FDIC $10.6bn as part of the deal.
The only bigger bank failure in US history was the collapse of Washington Mutual in 2008. While First Republic’s market capitalisation was $25bn in February, all its previous shareholders have now been wiped out.
The US Treasury said it was “encouraged” that depositors had been protected and that costs to the FDIC’s deposit insurance fund — estimated at about $13bn — had been minimised by the deal with JPMorgan.
“The banking system remains sound and resilient, and Americans should feel confident in the safety of their deposits,” it added.
The regulators’ move follows weeks of turmoil in the US banking system after the failure of Silicon Valley Bank in March.
First Republic, which is marginally bigger than SVB, is the third bank to be taken over by the FDIC in less than two months, as rising interest rates have weakened banks that relied on low-cost deposits.
Many midsized banks initially suffered deposit runs and share price collapses after SVB went bust, although most have stabilised in recent weeks.
But First Republic revealed last Monday that it had suffered more than $100bn in outflows. It had $229.1bn in assets when it was taken over and ranked as the nation’s 14th largest lender at the end of 2022.
Its takeover and sale came after a frantic weekend in which the FDIC invited half a dozen financial companies to review detailed information about First Republic’s assets and deposits. JPMorgan, PNC and Citizens were among the lenders that put in binding offers.
First Republic had been teetering on the brink of failure for nearly two months as deposits fled and its business model of providing cheap mortgages to wealthy customers was squeezed by rising interest rates. Its funding costs also rose rapidly and it racked up large paper losses on its mortgage book and other long-dated assets.
“I fear that delays in closing the bank may have contributed to the FDIC’s costs,” said former FDIC chair Sheila Bair. “For any failing bank, the longer regulators wait to close it, the more good customers and employees leave, eroding franchise value . . . On the plus side, as uninsured deposits shrink, it makes it easier for the FDIC to secure bidders for all deposits.”
The FDIC’s brief takeover of the bank allowed it to enter into a five-year burden-sharing arrangement with JPMorgan on unrealised losses in First Republic’s loan portfolio due to recent interest rate rises.
JPMorgan is acquiring $173bn in loans from First Republic, and approximately $30bn of securities. It is not assuming the failed lender’s corporate debt or preferred stock.
“Our government invited us and others to step up, and we did,” said JPMorgan’s chief executive Jamie Dimon. “Our financial strength, capabilities and business model allowed us to develop a bid to execute the transaction in a way to minimise costs to the deposit insurance fund.”
JPMorgan will recognise a one-time $2.6bn gain on the deal but said it expected to spend $2bn on restructuring costs in the next 18 months. The FDIC is also providing $50bn of five-year fixed-term financing.
The deal means that all First Republic depositors, including those above the $250,000 insurance limit, will retain access to their money when the bank’s 84 outposts in eight states reopen on Monday morning. JPMorgan said it would repay the $25bn in deposits that 10 other large banks placed with First Republic in a failed effort to stabilise the bank. Its own $5bn contribution will be eliminated.
JPMorgan said in an investor presentation that the deal “accelerates” and “complements” its wealth management strategy, which has focused on better off rather than super-rich customers.
Some First Republic branches will be converted to wealth management centres and the smaller bank’s wealth management platform will become part of JPMorgan Advisors.
Monday’s transaction follows the FDIC’s seizure last month of SVB and Signature Bank, in both of which government authorities invoked a so-called systemic risk exemption. That move allowed the FDIC to guarantee all deposits at the banks to stem contagion. But the immediate sale to JPMorgan does not involve such a step.
As the nation’s largest bank, JPMorgan would ordinarily be barred from acquiring another lender because it controls more than 10 per cent of American deposits. But regulators can waive the cap if necessary. JPMorgan said that all regulatory approvals had been obtained and estimated that the deal would add roughly $500mn of annual income to its earnings.