JPMorgan Chase to take over struggling First Republic Bank

JPMorgan Chase has agreed a rescue package for San Francisco-based First Republic Bank – the latest financial institution implicated in a rising tidal wave of US banking collapses.

A “substantial majority” of First Republic’s assets will be taken over by JPMorgan Chase – including US$173bn in loans and $30bn in securities, as well as around $92bn of customer deposits including $30bn of large bank deposits.

It will mean that First Republic’s 84 bank branches, spread throughout eight different states, are able to open as normal this week.

Founded in 1985, First Republic offered private banking and wealth management with a client base that consisted primarily of high net-worth individuals and their businesses. It was acquired by Merrill Lynch in 2007 before being re-listed on the New York Stock Exchange in 2010, having been sold by Merrill Lynch’s new owner, Bank of America.

In order to fuel its rapid growth, First Republic focused on offering preferential interest rates to wealthy clients – but this led to a loan book, at the time of JPMorgan Chase’s takeover, that was nearly double the amount held in deposits. A ‘safe’ loan-to-deposit ratio is considered to be between 80% and 90%.

Last week, the bank said it had experienced “unprecedented deposit outflows” in the first quarter amounting to $72bn, despite receiving $30bn in deposits from several large US banks – including JPMorgan Chase – in an attempt to quell concerns about First Republic’s future. The extent of its diminished deposits led to concern about a run on the bank, which has now been resolved by JPMorgan Chase’s rescue deal. Even before the deal, First Republic’s loan-to-deposit ratio would have been higher than 100%.

First Republic is latest banking failure

First Republic is just the latest bank to collapse, following the failures of Silicon Valley Bank and Signature Bank in the US. Those institutions were closed by the Federal Deposit Insurance Corporation (FDIC) in California and New York respectively back in March.

Regulators raced to salvage the collapsed Silicon Valley Bank (SVB) after a ‘hole’ emerged in its finances, prompted by customer deposits invested in US government bonds. These would usually be considered safe investments, yet climbing interest rates had impacted many of them and, when customers started drawing down on their deposits, SVB was forced to sell the bonds at a loss.

There was just 48 hours between SVB publicly revealing it had sold the assets, and the bank collapsing. It was later rescued by HSBC in the UK, while First Citizens Bank reached a rescue deal for Silicon Valley Bank in the US. It was the 17th failed bank that North Carolina-based First Citizens Bank has made since 2009, according to the FDIC.

The banking system’s endemic troubles are not restricted to the US; later in March, UBS agreed to rescue troubled Swiss bank Credit Suisse after it reported “material weaknesses” in internal controls around financial reporting. The Swiss institution already found itself in a difficult spot, facing a number of legal and compliance-related issues including a criminal conviction in Bulgaria for allowing drug dealers to launder money.

After Credit Suisse’s largest investor opted not to provide assistance, the bank was forced to ask the SNB for US$50mn in emergency loans before UBS agreed to buy the troubled bank for $3.25bn.

Consolidation of the global banking industry

The US’ third major banking failure in a matter of weeks will understandably amplify fears of an unstable global banking system – and questions will inevitably be asked about the extent of banks’ financial safeguards as well as the way they handle customer deposits.

Firstly, the cost to the Deposit Insurance Fund of stepping in to protect First Republic Bank is set to be about $13bn.

The deal protects account holders’ deposits and prevents another US banking crisis, but there are also concerns about the broader market implications post-acquisition. In total, First Republic had approximately $229.1bn in total assets and $103.9bn in total deposits, the FDIC says. The bulk of that will be assumed by JPMorgan Chase, which itself has $3tn of assets under management, per its latest quarterly release.

Detractors of the global banking system will argue that these rescue deals concentrate power in too few hands, and line the pockets of already cash-rich institutions. In the UK, global banking giant HSBC – which bailed out SVB’s UK operations for just £1 – has already said that the takeover provided a “provisional gain” worth £1.5bn in its own first-quarter results.

JPMorgan Chase expects the First Republic takeover to contribute more than $500m in incremental net income per year, as well as a one-time upfront gain of $2.6bn – which is partially offset by an expected $2bn’s worth of restructuring costs related to the acquisition. Neither the FDIC nor JPMorgan Chase have confirmed publicly whether any fee will be paid for the institution’s acquisition of First Republic’s assets.

Writing on Twitter, Senator Elizabeth Warren says: “The failure of First Republic Bank shows how deregulation has made the too big to fail problem even worse. A poorly supervised bank was snapped up by an even bigger bank – ultimately taxpayers will be on the hook. Congress needs to make major reforms to fix a broken banking system.”

First Republic ‘modestly accretive’ to JPMorgan Chase

In a statement, JPMorgan Chase CEO Jamie Dimon says: “Our government invited us and others to step up, and we did. Our financial strength, capabilities and business model allowed us to develop a bid to execute the transaction in a way to minimise costs to the Deposit Insurance Fund.

“This acquisition modestly benefits our company overall, it is accretive to shareholders, it helps further advance our wealth strategy, and it is complementary to our existing franchise.”

The acquired business will be led jointly by JPMorgan Chase’s Consumer and Community Banking Co-CEOs, Marianne Lake and Jennifer Piepszak. They say First Republic “has built a strong reputation for serving clients with integrity and exceptional service” and pledged to treat incoming employees with respect, care and transparency.