First Republic Bank is seized by regulators and sold to JPMorgan Chase

Regulators seized control of First Republic Bank and sold it to JPMorgan Chase on Monday, a dramatic move aimed at curbing a two-month banking crisis that has rattled the financial system.

First Republic, whose assets were hit by the rise in interest rates, had struggled to stay afloat after two other lenders collapsed last month, spooking depositors and investors.

First Republic was taken over by the Federal Deposit Insurance Corporation and immediately sold to JPMorgan. The deal was announced hours before US markets are due to open, and after a tussle by officials over the weekend.

Later on Monday, 84 First Republic branches in eight states will reopen as JPMorgan branches.

JPMorgan will “take over all of the deposits and substantially all of the assets of First Republic Bank,” the FDIC said in a statement. The regulator estimated that the insurance fund would have to pay out about $13 billion to cover First Republic’s losses.

“Our government invited us and others to step up, and we did,” said Jamie Dimon, JPMorgan’s chief executive. He said the transaction was intended “to minimize costs for the deposit insurance fund.”

The acquisition makes JPMorgan, already the nation’s largest bank, even bigger and could draw political scrutiny from progressive Democrats in Washington.

First Republic failed despite receiving a $30 billion lifeline from 11 of the nation’s largest banks in March. It will go down in history as the second largest US bank by assets to collapse after Washington Mutual, which failed during the 2008 financial crisis.

The government’s takeover and sale of First Republic comes seven weeks after the government seized control of Silicon Valley Bank and Signature Bank, whose failures sent shockwaves through the industry and raised fears that other regional banks were at risk of similar runs on deposits.

Many banking experts said First Republic’s struggles were a belated reaction to the turmoil in March rather than the opening of a new phase in the crisis. Investors and industry leaders are optimistic that no other medium or large lenders are in danger of imminent failure. As First Republic’s stock plunged again last week, other bank stocks barely budged.

Still, the US financial system has many problems. The recent bank failures and rising interest rates have forced banks to rein in lending, making it harder for businesses to expand and individuals to buy homes and cars. That is one of the reasons why the economy has slowed in recent months.

JPMorgan shares rose about 3 percent in premarket trading, while the S&P 500 was poised for a flat opening.

The $30 billion cash infusion helped calm broader fears about the banking system, but did not allay concerns about the viability of First Republic. The lender, founded in 1985, was the 14th largest bank in the US at the start of this year. Shares lost almost all of their value after a relentless series of steep falls that began when Silicon Valley Bank faltered.

The end of First Republic came after weeks in which the bank and its advisers sought to either save the bank or find a buyer outside of a government takeover. But the effort fell flat: Other banks were reluctant to buy it or parts of the bank without assurances that they wouldn’t be left with billions of dollars in losses. Last week, after an alarming earnings report in which the bank revealed that customers had withdrawn more than half of their deposits, it became clear that there was no option outside of a government takeover.

Late last week, the FDIC contacted other financial institutions, including JPMorgan Chase, PNC Financial Services and Bank of America, seeking bids for First Republic. Bidders had until Sunday at 12.00 to deliver their offers. As part of the tender process, the banks were also asked which parts of the bank they would not accept.

Like the other two failed banks—Silicon Valley Bank and Signature—First Republic collapsed under the weight of loans and investments that lost billions of dollars in value as the Federal Reserve quickly raised interest rates to fight inflation. When it became clear that these assets were now worth much less, First Republic’s wealthy clients, most of whom live on the coast, began pulling their money out as fast as they could, and investors dumped the stock.

Last Monday, First Republic disclosed that customers had withdrawn $102 billion in deposits in the first three months of the year — well over half of the $176 billion it had by the end of 2022. It also said it had borrowed $92 billion, mostly from the Fed and government-backed lending groups, which actually acknowledge that they had to turn to the financial industry as a last resort to keep their doors open.

The bank’s dismal financial statements only raised investors’ worst fears – that the FDIC would have to take over the bank.

By Thursday night, First Republic and its advisers knew it was out of options except for a government takeover. The FDIC worked with financial advisory firm Guggenheim Partners on the process, according to three people with knowledge of the situation.

Federal regulators are in defense mode. Last week, the Fed and FDIC published reports criticizing themselves for not adequately regulating Silicon Valley Bank and Signature. The reports also blamed the banks for poor management and excessive risk-taking.

First Republic had many clients in the start-up industry – like Silicon Valley Bank – and in the financial industry, including senior bankers and hedge fund managers. Many of the accounts had more than $250,000, the federal deposit insurance limit.

First Republic’s collapse could add to fears of an economic downturn. The upheaval that began with the failure of Silicon Valley Bank has made banks and investors more cautious, industry experts and economists say. And this caution can make lending more difficult and expensive, and hinder business expansion and hiring. The First Republic seizure and its aftermath could encourage the Fed to slow or stop rate hikes if it believes the failure will cause banks to tighten lending further.

Because of the type of clients it served—a large portion of them multimillionaires—the bank’s executives often talked about the safety of its business model and its growth. The customer base had little history of default, but the bank took out mortgages when interest rates were very low and kept them on the books rather than selling them to investors. First Republic’s large stockpile of mortgages lost value each time mortgage rates on new loans rose over the past year.

Other regional lenders, such as Utah’s Zions Bank and PacWest in Los Angeles, have consolidated their footing faster than First Republic, and banking analysts do not see another collapse as imminent. Shares of every other bank in the S&P 500 rose on Friday, although First Republic shares ended the day down more than 40 percent in anticipation of the government takeover.

Rob Copeland contributed reporting.

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