Regulators have seized control of the First Republic Bank and they sold it to JP Morgan. The bailout comes less than two months after the collapse of Silicon Valley Bank and Signature Bank, whose failures sent a shockwave through the sector and forced the Federal Reserve to step in with emergency measures to stabilize markets.
This was announced in a statement by the US regulatory authority, explaining that the American banking giant has reached an agreement for the sale of most of the bank's assets, taken over by the Federal Deposit Insurance Corporation (Fdic). How writes the Wall Street Journal, the operation will cost 229,1 billion dollars.
On Monday, May 1, 84 First Republic branches in eight states will reopen as branches of JPMorgan.
First Republic saved by JP Morgan: the deal
JP Morgan "will assume all deposits and substantially all assets of First Republic Bank," the FDIC said in a statement. In detail, Jp Morgan will detect 173 billion loans it's about 30 billion securities of First Republic, including $92 billion in deposits, but will not take over the bank's debts or buy out its preferred stock.
The regulator has estimated that its insurance fund will have to pay about 13 billion dollars to cover the losses of the First Republic.
The buyer estimates approximately $2,6 billion in gains from the acquisition but over $2 billion in restructuring costs over the next 18 months.
The collapse of First Republic: what happened
The lender, founded in 1985, was the 14th largest bank in the United States at the start of this year. Its shares have lost almost all of their value (-97%), after an unstoppable series of sharp declines that began with the collapse of Svb. But let's take a step back.
Poor management and excessive risk-taking
Like the other two failed banks — SVB and Signature — First Republic collapsed under the weight of loans and investments that lost billions of dollars in value as the Fed raised interest rates rapidly to fight inflation. When it became apparent that those businesses were worth far less, wealthy First Republic clients began to withdraw their money as quickly as possible, and investors began dumping their own shares after yet another decline in the bank's market capitalization (to below $1 billion).
On Monday, First Republic revealed that customers withdrew $102 billion in deposits in the first three months of the year — well over half of 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 lenders, effectively acknowledging that they have to turn to the financial sector's lenders of last resort to keep the doors open.
The Californian bank's dismal financial reporting only fueled investors' worst fears that the Federal Deposit Insurance Corporation would take over.
First Republic: Rescue attempts before JP Morgan
For weeks, the bank and its advisers have been trying to find a way to save it or at least find a buyer outside the government. But the efforts were in vain: other banks were reluctant to buy the bank or parts of it without collateral. Last week, after an alarming earnings report in which the bank revealed customers had withdrawn more than half of its deposits, it became clear there was no other option but a government takeover. .At that point, the Fdic contacted other financial institutions – including JP Morgan, PNC Financial Services e Bank of America – looking for offers for the First Republic. Bidders had until Sunday, April 30 to submit their offers.
What will happen now?
Despite the bailout, the US financial system has many problems. Recent bank failures and rising interest rates have forced banks to cut back on lending, making it more difficult for businesses to expand and for individuals to buy homes and cars. One reason why the economy has slowed down in recent months.
The seizure of the First Republic and its aftermath could embolden the Fed a slow or suspend rate hikes interest, if it believes that bankruptcy could lead banks to further reduce lending.
