First Republic Bank Seized and Sold to JPMorgan Chase: Second-Largest Bank Failure in US History
On Monday morning, First Republic Bank was seized by the Federal Deposit Insurance Corp. (FDIC) and sold to JPMorgan Chase & Co. as part of an auction.[0] The bank had been teetering for weeks, with depositors pulling almost half their money, and its stock had plummeted. JPMorgan Chase acquired $173 billion of loans and $30 billion of securities in the deal, making it the second-largest bank failure in US history, following Washington Mutual in 2008. First Republic is the third big bank failure in just two months, following Silicon Valley Bank and Signature Bank.[1] The FDIC estimates that the cost to its Deposit Insurance Fund will be around $13 billion.[1] This agreement represents the US's second-largest bank collapse to date and the third one this year. This puts the March banking crisis back in the spotlight after a period of relative calm since the failures of Silicon Valley Bank and Signature Bank.[2]
JPMorgan Chase was one of the banks that contributed part of the $30 billion in March.[3] It is buying about $173 billion of the bank’s loans, including its commercial real estate loan book, and $30 billion in securities.[0] The shareholders of First Republic will face complete loss, while JPMorgan will remit $10.6 billion to the insurance fund of the government.[4] The FDIC agreed to provide JPMorgan with $50 billion in long-term loans and take on 80% of any losses that JPMorgan suffers in the next five years on loans that First Republic made to companies, and the same for the next seven years for residential mortgages.[4]
However, this deal has raised concerns among some analysts and politicians. Senator Elizabeth Warren tweeted that the failure of First Republic Bank shows how deregulation has made the too-big-to-fail problem even worse.[5] A poorly supervised bank was snapped up by an even bigger bank, ultimately leaving taxpayers on the hook.[6] The banking system is in dire need of significant reforms that only Congress can implement.[5]
The analogy of bigger fish is also relevant in the case of bank failures.[7] Just one month ago, the midsize Silicon Valley Bank (assets $209 billion) was the second-largest bank failure in US history. Now First Republic is the second-largest, after Washington Mutual in 2008 (assets: $307 billion).[7] It confirms two old truths. Due to their inherent fragility, banks are susceptible to sudden runs by depositors which can quickly cripple them.[4] The second fact is that in the event of a major bank's impending failure, the federal government typically intervenes by either providing guarantees or utilizing taxpayers' funds. This is due to concerns that an unregulated downfall could result in widespread panic and trigger a financial crisis throughout the entire economy.[4]
0. “What First Republic's Sale to JPMorgan Means for Real Estate” The Real Deal, 1 May. 2023, https://therealdeal.com/national/2023/05/01/watch-breaking-down-first-republics-seizure-and-sale-to-jpmorgan
1. “‘Other problems might be lurking': Strategist is unconvinced by Jamie Dimon's bank crisis comments” CNBC, 2 May. 2023, https://www.cnbc.com/2023/05/02/strategist-left-unconvinced-by-jamie-dimons-crisis-comments.html
2. “First Republic’s Jumbo Mortgages Brought On Bank’s Failure” Yahoo Finance, 1 May. 2023, https://finance.yahoo.com/news/first-republic-jumbo-mortgages-brought-155820982.html
3. “Citizens, PNC, UMB Stock Plummet After First Republic’s Epic Failure—Here Are The Bank Stocks That Are Plunging” Forbes, 1 May. 2023, https://www.forbes.com/sites/brianbushard/2023/05/01/citizens-pnc-umb-stock-plummet-after-first-republics-epic-failure-here-are-the-bank-stocks-that-are-plunging
4. “Deregulating Banks Is Dangerous” The New Yorker, 1 May. 2023, https://www.newyorker.com/news/our-columnists/deregulating-banks-is-dangerous
5. “First Republic fallout: Democrats fume as regulators bail out yet another failed bank” The Hill, 1 May. 2023, https://thehill.com/business/3982091-first-republic-fallout-democrats-fume-as-regulators-bail-out-yet-another-failed-bank/
6. “Why JPMorgan's deal for a failing bank has Elizabeth Warren upset” POLITICO, 1 May. 2023, https://www.politico.com/news/2023/05/01/jpmorgans-dimon-sparks-new-clash-over-too-big-to-fail-banks-00094735
7. “The Executives Who Got Rich While Their Banks Collapsed” The New Republic, 2 May. 2023, https://newrepublic.com/article/172339/executives-rich-first-republic-bank-collapse
