JPMorgan Chase Bank has acquired First Republic Bank, following its seizure by the Federal Deposit Insurance Corp. (FDIC). The deal was made to address renewed weakness in the banking industry. As part of the deal, JPMorgan will acquire essentially all of First Republic’s assets while simultaneously taking responsibility for all of First Republic’s deposits. JPMorgan bankers have already begun contacting First Republic’s customers to assure a smooth transition.
Why Did First Republic Bank Fail?
First Republic Bank was a regional bank which made many long-term investments in assets such as home mortgages and government securities when rates were low. When the Fed kicked off a series of high-speed rate hikes roughly 14 months ago, First Republic was left unprepared. Tight economic conditions left the bank exposed to a rising interest rate environment, but it wasn’t the only one.
The collapse is likely to raise questions about the performance of federal regulators, and what they can do to prevent another failure like First Republic Bank. Reports from the Fed and the FDIC had blamed bank executives for mismanaging their operations and said federal supervisors had been lax.
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JPMorgan’s Acquisition of First Republic
JPMorgan, a titan of wealth management, had initially been attracted to the acquisition by First Republic’s own wealth management business, which has $289.5bn in assets and produced $223m in fee revenue during the first quarter. JPMorgan CEO Jamie Dimon stated that the acquisition of First Republic would help to stabilize the system after the country’s third bank failure in two months. Despite the bank’s failure, Dimon said the broader banking system was sound.
Judging by JPMorgan’s stock performance this morning, this wasn’t just a tale of JPMorgan swooping in to save the system. More likely, this move is the ultimate, “buy low, sell high” for the asset management giant, whose stock is currently trading more than 3% higher on the news, breaking 52 week highs at the time of writing.
How Much Will First Republic’s Failure Cost, and Who Will Pay?
The FDIC estimates that First Republic’s failure will cost around $13 billion dollars. Who will pay? JPMorgan wants to make it clear: “Not us.” JPMorgan has stated that it will not assume First Republic’s corporate debt or preferred stock. Instead, the $13 billion dollars will be taken from the agency’s deposit insurance fund, which insured banks pay into every quarter. Wasting no time, First Republic’s 84 offices in eight states will reopen as branches of JPMorgan, and depositors will be able to access all of their beginning May 1st.
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Jamie Dimon Comments on First Republic
The banking crisis is “largely over.”
According to JPMorgan Chase CEO Jamie Dimon, the crisis that led to the downfall of three regional U.S. banks in recent weeks is largely over after the resolution of First Republic. JPMorgan emerged as the winner of a weekend auction for First Republic after regulators decided that time had run out on a private sector solution. Dimon stated that there are only so many banks that were offside this way and that this pretty much resolves them all. He also acknowledged that the country’s banking system is not immune to consequences or stress as interest rates continue to rise.
In Short: Here’s Why Banks Failed in March
The March turmoil exposed poor management by some mid-sized banks that essentially bet interest rates wouldn’t rise; or at least, not at the speed that they did. When rates did rapidly soar, those banks were caught out. In the wake of the sudden collapse last month of Silicon Valley Bank and Signature Bank, investors have punished other lenders that had similar characteristics to SVB. Companies with the highest percentage of uninsured deposits and losses on their balance sheet were most scrutinized.
The acquisition of First Republic will strengthen JPMorgan’s position as one of the leading banks in the US. It is hoped that the acquisition will help to stabilize the banking industry and prevent further collapses in the near future. The FDIC’s deposit insurance fund will take a hit as a result of the failure of First Republic, but it is hoped that the banking industry as a whole will be stronger as a result of the crisis. As interest rates continue to rise, it remains to be seen what impact this will have on other mid-sized banks and how regulators will respond to any future banking crises.
In relation to the acquisition, Wells Fargo analysts said that while some risks remain, it does not expect anymore bank failure any time soon.