US: JPMorgan buys First Republic: What's the deal?

It doesn't take long for a bank to go from "is" to "was." In the early hours of Monday morning, news that JPMorgan Chase & Co had acquired troubled US lender First Republic was confirmed. JPMorgan will acquire most of its assets and deposits, and the bank itself is now gone.

The Federal Deposit Insurance Corporation (FDIC), a US government corporation that insures deposits up to $250,000 (€228,000) in case a bank fails, announced the deal along with regulators in California, where First Republic was based. The FDIC took over the troubled bank initially and invited several lenders to buy First Republic, with JPMorgan Chase ultimately sealing the deal.

So First Republic Bank is no more, but the global banking crisis continues with no obvious end in sight. It's the third bank to be taken over by the FDIC since March, following the collapse of Signature Bank and Silicon Valley Bank. Silvergate Bank, mostly focused on the cryptocurrency sector, also collapsed in March.

First Republic is the biggest bank to fail so far in the 2023 crisis, marginally bigger than Silicon Valley Bank (SVB) and second in US history only to Washington Mutual, which collapsed in 2008 during the global financial crisis.

What went wrong with First Republic?

First Republic had been on life support ever since the collapse of Silicon Valley Bank in March. To revisit that one, briefly: SVB collapsed when depositors, spooked by concerns about the bank's liquidity, rushed to take out their holdings in a bank run.

The bank quickly fell as a result. Soon afterward, depositors began withdrawing from First Republic in huge numbers as they noted major similarities between the banks. Both served wealthy clientele, many of whom had uninsured deposits of over $250,000.

It was those with uninsured deposits that took money out of First Republic on a massive scale. Last week, the bank revealed that more than $100 billion had been withdrawn since the crisis began. That grim news prompted the final, fatal mass withdrawal.

Rising interest rates had also battered the bank as one of its main businesses was the sale of cheap mortgages to wealthy clients.

At one point, a group of eleven large US banks tried to prop it up with $30 billion in deposits. Ultimately that didn't work as the bank's share price collapsed and deposits continued to be withdrawn. However, the bank survived for longer than many expected with the FDIC waiting until last week to step in and force a sale.

What will happen to its remaining depositors?

All remaining First Republic depositors still have access to their money, including those who kept uninsured deposits of over $250,000 in the bank. On Monday morning, First Republic's 84 branches across eight US states reopened as Chase branches.

Is it a good deal for JPMorgan?

JPMorgan Chase is already the biggest bank in the US and this deal makes it considerably bigger.

It has acquired $173 billion (€157 billion) of loans, $30 billion of securities and $92 billion of deposits from First Republic. However, it will not take on First Republic's corporate debt or preferred stock, a specialized type of stock typically bought by financial institutions.

The FDIC will take on much of the burden of First Republic's collapse with JPMorgan Chase. It estimates that it will take a hit of around $13 billion to its insurance fund. JPMorgan Chase will pay around $10.6 billion to the FDIC as part of the deal.

The bank will also pay back $25 billion to the large lenders who made deposits in an attempt to keep First Republic going.

Yet the deal means JPMorgan Chase now controls well in excess of 10% of all American deposits. Ordinarily, such a deal would not have been allowed but regulators let it go ahead in order to limit the damage of the collapse. Wells Fargo analyst Mike Mayo wrote in a research note that JPMorgan's net deposits would increase by 3% as a result.

"We need large, successful banks in the largest economy in the world," JPMorgan Chase CEO Jamie Dimon told journalists on Monday. "We have capabilities to serve our clients, who can be cities, schools, hospitals, governments. We bank the IMF, the World Bank. And anyone who thinks the United States should not have that can call me directly."

Yet the deal immediately drew criticism for the fact that the USA's biggest bank had just made itself much bigger.

US Senator Elizabeth Warren said it showed that "deregulation has made the 'too big to fail' problem even worse."

The end of it?

US President Joe Biden hailed the deal on Monday, saying it protected depositors without making taxpayers pay excessively. "These actions are going to make sure that the banking system is safe and sound," he said. However, he repeated his long-stated goal for tougher regulation in the financial sector.

Many analysts and industry figures said the deal should calm markets but they warned it was part of a worrying trend of big banks getting bigger, making it harder for medium and small lenders as a result.

Dennis Kelleher, president and CEO of Wall Street reform group Better Markets, told Reuters that the deal revealed "unhealthy consolidation, unfair competition, a dangerous increase in too-big-to-fail banks...all while harming community banks, small business lending, and economic growth."

As for JPMorgan Chase, Dimon said on Monday he thought the deal heralded the beginning of the end of the crisis. "This is getting near the end of it, and hopefully this helps stabilize everything," he said.

Not everyone is so confident. At the Milken Institute investor conference, held in LA just hours after the takeover, several industry insiders warned that the banking crisis was far from over.

Many believe tougher regulation is now certain. The FDIC says it is looking at changing its deposit insurance scheme with regard to business accounts. It cited the high level of uninsured depositors in certain pockets of the banking system. That was a common theme in the collapses of Silicon Valley Bank and First Republic.

That may provide some of the tougher regulation many are calling for, but there will be questions about how much banks will have to pay to foot the bill of higher insurance costs.

"We're going to see a real ratcheting-up of regulation in the banking system," David Hunt, chief executive of asset manager PGIM, said at the event. He said new rules would particularly impact smaller and regional banks. 

Many at the conference also focused on the likelihood of interest rates rising further, further hitting the supply of credit and making things harder for smaller lenders.

That could see a surge in mergers and takeovers. "There are a lot of signs pointing to the fact that the consolidation period has just begun," Dan Goerlich, a partner at PwC who focuses on US financial deals, told Reuters.

A period of continued turbulence seems inevitable, but many still believe the industry as a whole can contain it.