Monday saw the resolution of the largest U.S. bank failure since the 2008 financial crisis, as regulators seized First Republic Bank (FRC.N) and sold its assets to JPMorgan Chase & Co (JPM.N).
Due to the March panic that followed the failure of two other medium-sized U.S. banks, First Republic was among the regional U.S. lenders hardest hit by the crisis in trust in the banking sector.
as limping along for a while, the bank saw a fresh exodus of investors as it reported first-quarter withdrawals of over $100 billion and a desire to pursue alternative strategies last week.
It was the third big U.S. bank failure in two months and the largest since Washington Mutual in 2008 when, on Monday, California regulators seized the First Republic and placed it under FDIC receivership along with the auction of its assets.
The KBW Regional Banking Index (.KRX) finished Monday down 2.7%, while shares of JPMorgan gained 2%. According to Wedbush, the deal will result in a complete wipeout for First Republic’s shareholders. In premarket trading on Monday, the bank’s shares dropped 43.3% before being temporarily halted.
JPMorgan would pay $10.6 billion
As part of the agreement, JPMorgan would pay $10.6 billion to the U.S. Federal Deposit Insurance Corp (FDIC) to acquire the majority of First Republic Bank’s assets and get access to the exclusive clientele of the San Francisco institution.
“Our government invited us and others to step up, and we did,” said Jamie Dimon, Chairman and CEO of JPMorgan, who was also instrumental in the 2008 financial crisis and purchased Bear Stearns in a weekend rescue.
The preliminary estimate from the regulator indicates that the transaction will cost the Deposit Insurance Fund of the FDIC around $13 billion.
On Monday, President Joe Biden of the United States praised the agreement for its ability to safeguard depositors without burdening taxpayers. He once again advocated for stricter banking guidelines and oversight.
Vice President Joe Biden said at a White House event, “These actions will ensure that the banking system is safe and sound.” “At a fundamental level, taxpayers are not responsible.”
The administration has lauded the “decisive” measures adopted by banking authorities to safeguard depositors and maintain financial stability. Karine Jean-Pierre, White House press secretary, said the measures would ensure that the First Republic, which she called “severely mismanaged,” would be held accountable.
Are These Institutions Just Too Big to Fail?
The arrangement, reached over the weekend after the FDIC held an auction procedure in which many other banks competed, should calm markets, according to analysts and industry executives. They did note, however, that larger banks were benefiting at the expense of smaller ones as competition increased.
Better Markets CEO Dennis Kelleher criticized the auction result as evidence of “unhealthy consolidation, unfair competition, a dangerous increase in too-big-to-fail banks,” which would have a negative impact on community banks, small business financing, and economic growth.
More than 10% of all deposits in U.S. banks are already held by JPMorgan. According to a report published by Wells Fargo, JPM’s net deposits will rise by 3% due to the transaction.
“We need large, successful banks in the largest economy in the world,” Dimon said on a conference call with reporters. Cities, schools, hospitals, and even governments are all potential customers, and we have the resources to help them. We are World Bank and IMF-approved lenders. And if you think the United States shouldn’t have it, please feel free to contact me personally.
Jane Fraser, CEO of competing firm Citigroup, praised the acquisition as removing the last big source of uncertainty for the sector.
Let’s not paint all small and regional banks with the same brush, Fraser said at a recent conference.
This is neither the savings and loans nor global financial collapse. Stress is inevitable, therefore let’s focus on the right areas.
PRICE HIKES
The collapse of Silicon Valley Bank and Signature Bank in March shook the financial world, prompting the Federal Reserve to take extraordinary measures to stabilize markets and requiring UBS (UBSG) to save Credit Suisse (CSGN.S) from collapse in Switzerland. The crypto-focused Silvergate intentionally went bankrupt, setting the stage for those disasters.
Some have pointed to the United States Federal Reserve’s decision to reverse its ultra-loose monetary policy of the previous years and rapidly increase interest rates over the past year as the primary cause of the banking sector crisis.
It was simple to place blame on management when it was simply SVB. It’s clear the Fed has gone too far, too quickly, and is fracturing things,” said Great Hill Capital’s Chairman and Managing Member Thomas J. Hayes.
According to individuals familiar with the situation, JPMorgan was one of several prospective purchasers who filed final bids on Sunday in an auction by U.S. authorities. Other bidders included PNC Financial Services Group (PNC.N) and Citizens Financial Group Inc (CFG.N).
According to the statement, JPMorgan has taken over all First Republic’s accounts and will reimburse $25 billion of the $30 billion that large banks deposited there in March.
JPMorgan Chase Bank will reopen the bankrupt bank’s 84 locations across 8 states as of Monday.
