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J.P. Morgan’s Acquisition of First Republic Deposits Marks Second Largest Bank Failure in US History

J.P. Morgan's Acquisition of First Republic Deposits Marks Second Largest Bank Failure in US History

J.P. Morgan Chase & Co., the largest bank in the United States, has acquired the substantial majority of assets and assumed certain liabilities of First Republic Bank, following an auction by Federal regulators for the troubled lender. This marks the second-largest bank failure in history, with the failure of the Silicon Valley Bank and Signature Bank, and the third major financial institution to collapse this year.

First Republic Bank had been suffering from deposit withdrawals since the failures of Silicon Valley Bank and Signature Bank, leading to concerns about the health of the US banking sector. In the first quarter of this year, the bank experienced $100 billion of deposit outflows, which put it on life support for two months. The bank had poor interest rate risk management and an asset/liability mismatch, which caused a funding crisis that ultimately led to its failure.

As per the purchase and assumption agreement, J.P. Morgan Chase Bank, N.A. will assume all of the deposits and substantially all of the assets of First Republic Bank, including around $173 billion of loans and approximately $30 billion of securities. Columbus, Ohio-based J.P. Morgan expects the acquisition to modestly add to earnings and generate more than $500 million of incremental net income per year, excluding the expected gain or restructuring costs.

J.P. Morgan recognizes an upfront, one-time, post-tax gain of around $2.6 billion, which does not reflect approximately $2.0 billion post-tax restructuring costs anticipated over the course of 2023 and 2024. In pre-market activity on the NYSE, J.P. Morgan shares are gaining around 3 percent, while First Republic Bank shares are losing around 46 percent after losing nearly 43 percent on last Friday’s regular trade.

Jamie Dimon, Chairman and CEO of J.P. Morgan Chase, stated, “Our government invited us and others to step up, and we did. Our financial strength, capabilities, and business model allowed us to develop a bid to execute the transaction in a way to minimize costs to the Deposit Insurance Fund.”

All depositors of First Republic Bank will become depositors of J.P. Morgan, and they have full access to their deposits. Deposits are secured under a ‘systemic risk exemption,’ just like Silicon Valley Bank. The Federal Deposit Insurance Corp. or FDIC, which was appointed as receiver after First Republic Bank was closed by the California Department of Financial Protection and Innovation, was in the auction process for finalizing a sale of the troubled bank. As per reports, about six banks, including J.P. Morgan, were bidding for the lender.

The acquired First Republic businesses will be overseen by J.P. Morgan’s Consumer and Community Banking or CCB Co-CEOs, Marianne Lake and Jennifer Piepszak. The deal includes acquisition of the substantial majority of First Republic Bank’s assets, including around $173 billion of loans and approximately $30 billion of securities. FDIC will provide loss share agreements covering acquired single-family residential mortgage loans and commercial loans, as well as $50 billion of five-year, fixed-rate term financing.

This latest collapse raises questions about whether the FDIC can continue to backstop all $17 trillion worth of deposits at regional banks in the US. The collapse of First Republic Bank will cost the FDIC fund $13 billion in losses, which could get worse.

With this acquisition, J.P. Morgan has expanded its portfolio and has become a major player in the US banking sector. It remains to be seen how this acquisition will affect the financial industry and whether it will be a good or bad move for J.P. Morgan.

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