JPMorgan Chase & Co., the largest bank in the United States, purchased First Republic Bank in an emergency government-led intervention after private rescue efforts failed to fill a hole in the troubled lender’s balance sheet and customers withdrew deposits. The assets acquired from First Republic included approximately $173 billion in loans, $30 billion in securities, and $92 billion in deposits. JPMorgan and the Federal Deposit Insurance Corp. (FDIC), which orchestrated the sale, agreed to share the burden of losses as well as any recoveries on the firm’s single-family and commercial loans.
The First Republic specialised in private banking for the wealthy, similar to Silicon Valley Bank, which went bankrupt in March and was focused on venture capital firms. According to a First Republic history, Chairman Jim Herbert founded the lender in 1985 with fewer than ten employees. The bank expects to be the 14th largest in the United States by July 2020, with 80 branches in seven states. At the end of last year, it employed more than 7,200 people.
As with other regional lenders, San Francisco-based First Republic found itself squeezed as the Federal Reserve raised interest rates to combat inflation, reducing the value of bonds and loans purchased when interest rates were low. Meanwhile, depositors fled, first in search of higher returns and then in fear as concerns about the health of the First Republic spread. As a result, there is a significant capital hole that would deter a full-scale rescuer from stepping forward.
On March 16, eleven US banks pledged $30 billion in new deposits to keep the First Republic afloat, with JPMorgan, Bank of America Corp., Citigroup Inc., and Wells Fargo & Co. each contributing $5 billion. Goldman Sachs Group Inc., Morgan Stanley, and other banks offered smaller sums as part of a plan devised in collaboration with US regulators. In addition, First Republic used a Federal Home Loan Bank liquidity line and a Federal Reserve liquidity line.
Despite the efforts of the banks, First Republic was unable to survive. The bank’s first-quarter report and news of its attempt to sell assets and engineer a rescue sparked renewed concern in April. The bank announced that it would lay off up to 25% of its workforce, reduce outstanding loans, and curtail non-essential activities.
First Republic shares had fallen more than 33% by 4:06 a.m. in New York during premarket trading, putting the company on track to extend its 97% decline this year. JPMorgan’s stock increased by 3.8%. According to a statement, JPMorgan expects to recognise a one-time gain of $2.6 billion as a result of the transaction. The bank estimated that related restructuring costs would total $2 billion over the next 18 months. The $92 billion in deposits includes the $30 billion invested in the beleaguered lender by JPMorgan and other large US banks in March to try to stabilise its finances. JPMorgan promised that the $30 billion would be repaid.
JPMorgan and the FDIC entered into a loss-sharing agreement to cover single-family residential mortgage loans and commercial loans, as well as $50 billion in five-year fixed-rate term financing, for the $173 billion in loans and $30 billion in securities included in the deal. The FDIC and JPMorgan will bear a portion of both the losses and potential recoveries on the loans, with the FDIC stating that it should “maximise recoveries on the assets by keeping them in the private sector.”
The acquisition of First Republic Bank by JPMorgan is a significant event in the banking industry, and it has piqued the interest of investors, regulators, and the broader financial community.
