JPMorgan Chase — On Monday, regulators finally took over First Republic, which led to the third failure of an American bank since March.
The move came after the failure of a last-ditch effort to sway rival lenders to keep the regional bank up and running.
Auction
JPMorgan Chase is already the most prominent US bank by several measures.
The bank emerged as the winner of the auction held for First Republic over the weekend.
As a result, JPMorgan Chase will receive all of the bank’s deposits and a substantial majority of assets.
The First Republic takeover now marks the largest bank failure since the 2008 financial crisis which saw the implosion of Washington Mutual.
At the time, JPMorgan Chase was also the winner of the failed banks’ assets.
A weak link
In March, Silicon Valley Bank experienced a sudden collapse, with attention swiftly shifting to First Republic as the weakest link in the US banking system.
Silicon Valley Bank was known for catering to the tech startup community.
Similarly, First Republic was a California-based specialty lender.
The bank was devoted to serving wealthy coastal Americans, attracting them with low-rate mortgages in exchange for entrusting the bank with some cash.
However, the model unraveled after Silicon Valley Bank collapsed when First Republic clients withdrew more than $100 billion in deposits.
The amount was revealed in its earnings report on April 24.
Financial institutions with high proportions of uninsured deposits like Silicon Valley Bank and First Republic were caught in a vulnerable state as clients were concerned about losing savings in a bank run.
As of Friday’s close, First Republic shares had a massive loss of 97%.
A better deal
JPMorgan Chase is getting over $92 billion deposits from the deal.
The deposit includes the $30 billion the bank and several others loaned First Republic in April.
Additionally, JPMorgan Chase is taking on $173 billion in loans and $30 billion in securities.
The Federal Deposit Insurance Corporation or FDIC agreed to share the losses on mortgages and commercial loans JPMorgan Chase assumed in the transaction.
Additionally, the organization provided the bank with a $50 billion credit line.
JPMorgan Chase is booking a one-time gain of over $2.6 billion on the deal, with expectations to spend over $2 billion on integration costs within the next 18 months.
The First Republic acquisition would also add over $500 million of profit annually to New York-based JPMorgan Chase, excluding the one-time costs.
As part of the transaction, the bank said it is making a $10.6 billion payment to the FDIC.
JPMorgan Chase said the First Republic shares would operate as usual by Monday, but it plans to retire the First Republic brand.
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Transaction cost
The weekend auction saw bids from JPMorgan Chase, PNC, and other banks.
According to the FDIC, the interest in First Republic was a highly competitive bidding process.
The transaction would cost the FDIC’s Deposit Insurance Fund an estimated $13 billion.
By comparison, the SVB process cost the fund over $20 billion.
On Monday, the California Department of Financial Protection and Innovation said it took possession of First Republic and later appointed the FDIC as the receiver.
The FDIC accepted JPMorgan Chase’s bid for the bank’s asset.
They later released a statement, saying:
“As part of the transaction, First Republic Bank’s 84 offices in eight states will reopen as branches of JPMorgan Chase Bank, National Association, today during normal business hours.”
“All depositors of First Republic Bank will become depositors of JPMorgan Chase Bank, National Association, and will have access to all of their deposits.”
JPMorgan Chase CEO Jamie Dimon referenced the acquisition in a statement on early Monday morning.
“Our government invited us and others to step up, and we did,” said Dimon.
“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.”
After the takeover on Monday morning, the Treasury Department sought to reassure the country about the financial system.
A spokesperson representing the Treasury said:
“The banking system remains sound and resilient, and Americans should feel confident in the safety of their deposits and the ability of the banking system to fulfill its essential functions of providing credit to businesses and families.”
