Regulators took control of First Republic Bank and sold it to JPMorgan Chase on Monday, a dramatic move aimed at stemming a two-month banking crisis that has roiled the financial system.
First Republic is the second largest US bank by assets after Washington Mutual, which failed during the 2008 financial crisis and was also acquired by JPMorgan.
Founded in 1985 and the 14th largest bank in the US earlier this year, First Republic’s assets have been hit by rising interest rates, and the company is struggling to stay afloat after two lenders collapsed in March , which spooked depositors and investors.
First Republic’s takeover of the Federal Deposit Insurance Corporation and the sale of JPMorgan were announced hours before the US markets opened, and after officials clashed over the weekend. As of Monday, 84 First Republic branches in eight states reopened as JPMorgan branches.
“This part of the crisis is over,” Jamie Dimon, JPMorgan’s chief executive, said in a conference call on Monday. “For now we all need to take a deep breath.”
Investors welcomed JPMorgan’s takeover, sending the bank’s stock 3.5 percent higher on Monday. The stocks of PNC Financial Services and Citizens Financial Group — two regional banks that lost out in a bid for First Republic — each traded up more than 5 percent.
Shareholders and debt holders of First Republic will be wiped out in this deal, a common occurrence when a bank is placed in government receivership. The name of the First Republic and its logo – a soaring eagle with wings in the shape of a V – will be eliminated, and the bank’s branches will become outlets of JPMorgan Chase.
The FDIC estimated that its insurance fund would have to pay out about $13 billion to cover First Republic’s losses. JPMorgan also said the FDIC would provide it with $50 billion in financing and that JPMorgan would pay $10.6 billion to the FDIC.
“Our government invited us and others to move forward, and we did,” Mr. Dimon said. He said the transaction was intended “to reduce the costs of the Deposit Insurance Fund.”
The acquisition makes JPMorgan, the nation’s largest bank, even bigger and more established. criticized by some lawmakers. “Since the financial crisis of 2008, regulators have tried to prevent the largest banks from becoming more dominant,” Ian Katz, an analyst at Capital Alpha Partners, wrote in a research note. Increasing JPMorgan’s size “will not please lawmakers from both sides of the aisle, but will be especially appreciated by progressives who fight against consolidation through M&A.”
First Republic failed despite receiving a $30 billion lifeline from 11 of the country’s largest banks in March. JPMorgan said that the $30 billion will be paid after the end of the deal.
The government takeover and sale of First Republic comes nearly eight weeks after the government took control of Silicon Valley Bank and Signature Bank, whose failures sent a shock wave through the industry and raised fears that other regional banks are at risk. in the same run of deposits.
Many banking experts say that the difficulties of the First Republic are a delayed reaction to the turmoil in March rather than the opening of a new phase of the crisis. Investors and industry executives are optimistic that no other midsize or large lenders are at risk of imminent failure.
Like two other 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 began to become apparent that these properties were now worth less, First Republic’s wealthy customers, many of whom lived on the coasts, began to withdraw their money as quickly as they could and the investors throw its shares.
“The cardinal sin of the FRC and SVB is that they grew too fast when interest rates were close to 0 percent,” said Timothy Coffey, a bank analyst at Janney Montgomery Scott, writing in a research note. , referring to First Republic and Silicon Valley Bank. “There are probably others. However, this is a limited set of institutions because most banks pass on taking pennies in front of a steamroller.
However, the US financial system has many problems. Recent bank failures and rising interest rates have forced banks to restrict lending, making it harder for businesses to expand and individuals to buy homes and cars. That’s one of the reasons the economy has slowed down in recent months.
The end of the First Republic came after weeks in which the bank and its advisers sought to save the bank or find a buyer other than a government takeover. But the efforts fell flat: Some banks were reluctant to buy them or pieces of them without assurance that they would not be left with billions of dollars in losses. Last week, after an alarming earnings report in which the bank revealed that customers had withdrawn more than half of its deposits, it became clear that there was no choice but to take over the government.
Last week, the FDIC reached out to other financial institutions, including JPMorgan Chase, PNC Financial Services and Bank of America, asking for bids for First Republic. Bidders have until noon on Sunday to submit their offers. As part of the bidding process, the banks were also asked what accommodations they would seek from the government to proceed, people familiar with the process said.
The sale process was expected to be completed on Sunday evening, but the announcement took place at midnight. Mr. JPMorgan’s Dimon said the bank had 800 employees working on the deal in the past few days.
The banking crisis has also put federal regulators on the defensive by exposing problems that analysts say government officials should have identified and forced banks to fix months ago. Last week the Fed and the FDIC published reports criticizing themselves for failing to adequately supervise Silicon Valley Bank and Signature. The reports also blamed the banks for poor management and excessive risk-taking.
First Republic has many clients in the startup industry – similar to Silicon Valley Bank – and in the financial industry, including senior bankers and hedge fund managers. Many of its accounts have more than $250,000, the federal deposit insurance limit.
The latest bank shutdown may keep the Fed from raising interest rates by a quarter point at its meeting on Wednesday, said Krishna Guha, head of global policy and central bank strategy team at Evercore ISI. In fact, he said, it could “clear the decks” for such a move by removing a lingering source of risk and uncertainty.
But Mr. Guha said banking issues are moving from an “acute” to a “chronic” phase: Some lenders may look to First Republic and other recent bank failure and will try to support their own positions by being more cautious about lending. .
“The macroeconomic effects of bank stress may only be in the early stages of unfolding,” said Mr. Guha.
Rob Copeland contributed to the report.
