On May 1, 2023, the financial industry was rocked by the news that First Republic Bank had been seized by regulators and sold to JPMorgan Chase. The takeover was a drastic measure taken to address the two-month banking crisis that had unsettled the financial system, resulting in the collapse of two other lenders last month.
First Republic, which had struggled to survive after being battered by the rise in interest rates, was taken over by the Federal Deposit Insurance Corporation (FDIC) and immediately sold to JPMorgan Chase. The acquisition involved JPMorgan assuming all of the deposits and most of the assets of First Republic Bank.
JPMorgan’s Chief Executive, Jamie Dimon, stated that the acquisition was aimed at minimizing costs to the Deposit Insurance Fund, and the deal would see JPMorgan repay the $30 billion that First Republic had received from 11 of the largest banks in March. The regulator estimated that its insurance fund would have to pay out about $13 billion to cover First Republic’s losses.
Following the takeover, 84 First Republic branches in eight states will reopen as JPMorgan branches, and JPMorgan shares rose about 3 percent in premarket trading, while the S&P 500 was poised for a flat open.
The government’s takeover and sale of First Republic comes seven weeks after the government took control of Silicon Valley Bank and Signature Bank, whose failures sent shockwaves through the industry and raised concerns that other regional banks were at risk of similar runs on deposits.
The recent bank failures and rising interest rates have forced banks to rein in lending, making it harder for businesses to expand, and individuals to buy homes and cars. That has contributed to the slowing of the economy in recent months.
Many banking experts believe that First Republic’s travails were a delayed reaction to the turmoil in March rather than the opening of a new phase in the crisis. Investors and industry executives are optimistic that no other midsize or large lenders are at risk of imminent failure. However, the U.S. financial system has plenty of problems that still need to be addressed.
The acquisition makes JPMorgan, already the nation’s largest bank, even bigger and could draw political scrutiny from progressive Democrats in Washington.
Late last week, the F.D.I.C. reached out to other financial institutions, including JPMorgan Chase, PNC Financial Services and Bank of America, seeking bids for the First Republic. Bidders had until noon Sunday to submit their offers. As part of the bidding process, banks were also asked what parts of the bank they wouldn’t accept.
Like the other two failed banks — Silicon Valley Bank and Signature — First Republic collapsed under the weight of loans and investments that lost billions of dollars in value as the Federal Reserve rapidly raised interest rates to fight inflation. When it started becoming apparent that those assets were now worth much less, First Republic’s affluent customers, most of whom live on the coasts, began pulling their money out as quickly as they could and investors dumped its shares.
Last Monday, First Republic revealed that clients had pulled $102 billion in deposits in the first three months of the year — well over half the $176 billion it held at the end of 2022. It also said it had borrowed $92 billion, mostly from the Fed and government-backed lending groups, effectively acknowledging that it had to turn to the financial industry’s lenders of last resort to keep the doors open.
The bank’s grim financial statement only fanned the worst fears of investors — that the F.D.I.C. would have to take over the bank.
By Thursday night, First Republic and its advisers were aware that it was out of options aside from a government takeover. The F.D.I.C. worked with the financial advisory firm Guggenheim Partners on the process, according to three people with knowledge of the situation.
Federal regulators are in defense mode. Last week the Fed and the F.D.I.C. published reports criticizing themselves for failing to adequately regulate Silicon Valley Bank and Signature. The reports also blamed the banks for poor management and excessive risk-taking.
First Republic had many clients in the start-up industry — similar to Silicon Valley Bank — and in the financial industry, including senior bankers and hedge fund managers. Many of its accounts held more than $250,000, the limit for federal deposit insurance.
First Republic’s collapse could add to concerns about an economic slowdown. The upheaval that began with the failure of Silicon Valley Bank has made banks and investors more cautious, industry experts and economists say. And that caution could make lending more difficult and costly, impeding business expansion and hiring.
First Republic’s closure probably keeps the Fed on track to raise interest rates a quarter point at its meeting on Wednesday, Mr. Guha said, as has been widely expected. In fact, he said, it may “clear the decks” for such a move by taking away a lingering source of risk and uncertainty.
But Mr. Guha said that the banking issues were moving from an “acute” to a “chronic” phase: Other lenders may look at First Republic and the other recent bank failures and try to shore up their own positions by becoming more cautious about lending.
“The macroeconomic effects of bank stress may only be in the early stage of unfolding,” Mr. Guha said.
Because of the types of clients it served — a large portion of them multimillionaires — the bank’s executives often spoke about the safety of its business model and its growth. Its customer base had little history of defaults, but the bank underwrote mortgages when interest rates were very low and kept them on its books rather than selling them to investors. First Republic’s large hoard of home loans lost value every time mortgage rates on new loans climbed over the last year.
Other regional lenders, like Utah’s Zions Bank and PacWest of Los Angeles, have firmed their footing faster than First Republic, and bank analysts do not see another collapse as imminent. The stocks of every other bank in the S&P 500 stock index rose on Friday even as First Republic’s shares ended the day down more than 40 percent in anticipation of the government takeover.