The First Republic failed to come up with a practical bailout and revealed last week that it lost more than $100 billion in deposits in the first quarter of the year, sending its shares plummeting. The federal authorities finally decided to intervene.
The US financial authorities have placed their hands on the California-based First Republic Bank, which will be acquired by JPMorgan, hoping to end the chapter of the banking crisis that unfolded in March. The bank has been under great pressure since the difficult situation faced by two financial institutions in early March, namely Silicon Valley and Signature.
The First Republic failed to come up with a workable bailout and revealed last week that it lost more than $100bn in deposits in the first quarter, sending its shares plummeting. The federal authorities, reluctant to bail out a third bank in such a short period of time, eventually decided to intervene.
With assets of $233 billion at the end of March, the First Republic is the second-largest bankruptcy in US history – excluding investment banks like Lehman Brothers – after the bankruptcy of Washington Mutual in 2008. The assets of Washington Mutual were acquired by J.P. Morgan is also headed by Jamie Dimon, and has repeatedly rescued troubled financial institutions.
“To protect depositors, the FDIC is entering into a buyout and acquisition agreement with JPMorgan Chase, the National Association, and Columbus, Ohio to take over all deposits and all assets of First Republic Bank,” the FDIC said in a statement. The bank’s branches will be able to resume their activities on Monday as usual.
Dimon, CEO of JPMorgan, said in a separate statement: “Our government invited us, along with others, to intervene and we have done so… Our solid financial position, capabilities and business model allowed us to make an offer, to execute the transaction in a way that reduces the costs of the Deposit Insurance Fund.”
The operation required the First Republic’s loans to be revalued, and the Deposit Insurance Fund agreed to bear part of the losses: the agency estimates that the operation would cost it about $13 billion.
The authorities and other major banks rushed to save First Republic Bank to avoid facing the same fate, as eleven financial institutions agreed to pay a total of $ 30 billion, but this step was not enough to reassure investors, and the bank’s shares continued to decline on Wall Street.
The value of the First Republic, which was founded in 1985 and is based in San Francisco, did not exceed $ 654 million in the stock market on Friday at the close, while its value was more than 20 billion at the beginning of the year and more than 40 billion in November 2021.
In the middle of the week, the agency responsible for guaranteeing bank deposits and the US Treasury Department contacted several banks to verify the extent of their interest in purchasing the assets of the First Republic, and on Friday it allowed six of them to obtain more financial information related to the First Republic, and the agency responsible for guaranteeing bank deposits said that the solicitation process It was “extremely competitive” and resulted in a deal that “meets minimum loss requirements”.
The First Republic Bank may seem interesting, because it was famous for attracting wealthy clients who deposited large sums of money in their accounts and repaid loans without problems, but many of its customers panicked after the bankruptcy of Silicon Valley and Signature.
The majority of the bank’s loans were real estate with fixed interest rates that lost value with the recent rise in interest rates. The question now is whether the bankruptcy of the First Republic will lead to the bankruptcy of other banks in a sector that has become unstable due to high interest rates.
Observers were worried about contagion risks after the March bankruptcies, which also turbulent the transatlantic sector and led to Credit Suisse defaulting. However, these concerns dissipated after several small and medium-sized banks published solid financial statements in the past two weeks.
“The First Republic bank was seen as a problem bank in mid-March and the announcement of its closure is not a new cause for concern,” Nicholas Fearon, an economist at the Peterson Centers for International Economics and Brueghel, said before the bankruptcy was formally declared. “If another bank proves unstable, that will be a problem.” New”.