The financial sector has been greatly affected by the recent downfall of several major banks, prompting regulators to take measures to avoid a recurrence of the 2008 financial crisis.
One of the recent occurrences was the takeover of First Republic Bank, a San Francisco-based bank that had assets worth more than $233 billion by the end of the first quarter.
The recent merger of First Republic Bank into JP Morgan has caused quite a stir in the financial world. It is the culmination of a series of events that started with the collapse of Silicon Valley Bank (SVB) in March of this year.
First Republic Bank, which had been one of the most valuable U.S. banking franchises, had been hit hard by rising interest rates and a pandemic savings boom.
The chronic problem turned into an acute one in March when SVB collapsed, sparking fears about the overlooked risks lurking in the banking system.
Investors and customers were especially worried about banks such as First Republic that relied heavily on uninsured deposits and had large unrealized losses in their loan and securities portfolios due to rising rates.
As a result, First Republic experienced a massive deposit run, with customers withdrawing around $100 billion from the bank in just a few days.
This left the bank with a badly damaged balance sheet and few good options. In a dismal quarterly earnings report, the bank disclosed the extent of the deposit run and said it had filled the hole on its balance sheet with expensive loans from the Federal Reserve and Federal Home Loan Bank. An untenable future, in which it earned less on its loans than it paid on liabilities, appeared all but certain.
The earnings report sent the bank’s stock down nearly 50% in one day, with First Republic shares ending the week at $3.51.
They had closed at $115 on March 8, the day before SVB’s disastrous run. Following these turmoiled situations, Some employees started jumping ship after SVB’s collapse, and First Republic lost around 10% of key staffers in the wealth-management division that it had spent heavily on building.
In the wake of the deposit run, First Republic had few good options. Bankers who had previously focused on luring in deposits found there was little they could do to reverse the tide when customers started pulling cash.
Pay took a hit too, as bankers were compensated in part by how much in customer deposits they brought to the bank. Business had grown quieter since the banking turmoil started, with current and former employees reporting that they feared the bank would go under soon.
It was in this context that the news broke of the merger between First Republic and JP Morgan. The FDIC announced that First Republic’s 84 branches would reopen as part of JP Morgan on Monday, with customers having full access to their deposits.
The FDIC also said that First Republic’s failure seemed unlikely to spur another crisis of confidence in the Main Street lenders that serve a large chunk of America’s businesses and consumers.
The merger was seen as a lifeline for First Republic, which had been struggling to survive in the wake of the deposit run. It also represented a significant opportunity for JP Morgan, which had long sought to expand its presence in the West Coast market. First Republic’s focus on serving wealthy clients was seen as a natural fit for JP Morgan’s private banking business.
The announcement of the merger was met with mixed reactions. Some analysts were bullish on the deal, citing the benefits to both banks. Others were more skeptical, noting the challenges that would be involved in integrating two very different banking cultures.
Following the takeover by JP Morgan, First Republic Bank began operating under the JP Morgan umbrella, with its 84 branches reopening to customers during normal business hours.
The Federal Deposit Insurance Corporation (FDIC) announced that customers would have full access to their deposits, and assured that the failure of First Republic Bank was unlikely to trigger a crisis of confidence in other Main Street lenders.
According to Steven Kelly, a senior researcher at the Yale Program on Financial Stability, First Republic’s problems began with SVB and Signature. The immediate cause of First Republic’s collapse was a smartphone-enabled exodus of panicked depositors with large uninsured balances.
However, the root cause of the bank’s problems was a wrong-way bet on interest rates. First Republic Bank had focused on America’s coastal elite, using large deposits from customers with a lot of cash to fund low-rate jumbo mortgages for wealthy home buyers.
Ultralow interest rates and a pandemic savings boom had fueled the bank’s growth, but when the Federal Reserve began raising interest rates to cool inflation, customers demanded higher yields to keep their money at First Republic Bank. Rising rates also reduced the value of loans the bank had made when interest rates were near zero.
This chronic problem became acute in March when the collapse of Silicon Valley Bank sparked fears about the overlooked risks in the banking system. Investors and customers were particularly worried about banks like First Republic that relied heavily on uninsured deposits and had large unrealized losses in their loan and securities portfolios due to rising rates. Mr. Kelly explained that it was a run on the business model.
First Republic’s balance sheet was badly damaged, leaving it with few good options. The bank disclosed the extent of the deposit run in a dismal quarterly earnings report, revealing that it had filled the hole on its balance sheet with expensive loans from the Federal Reserve and Federal Home Loan Bank. The banking turmoil had also led to a decline in business, with current and former employees stating that First Republic bankers who had previously focused on attracting deposits found it challenging to reverse the tide when customers started withdrawing cash. The pay of these bankers had also taken a hit, as they were compensated based on the amount of customer deposits they brought in.
However, in late April, CEO Michael Roffler and Executive Chairman Jim Herbert sent a pair of emails to First Republic employees, thanking them for staying focused during the turmoil. They reassured their staff that they would continue to serve their clients, support their communities, and take care of one another.
List of events leading up to the merger of First Republic Bank with JPMorgan
- March 2023: Silicon Valley Bank suffers a deposit run due to concerns about the bank’s exposure to the technology sector, causing panic in the market and leading to a broader sell-off of shares in regional banks.
- April 2023: First Republic Bank, heavily reliant on uninsured deposits, suffers a deposit run as customers demand higher yields amid rising interest rates.
- April 20, 2023: First Republic Bank reports a large outflow of deposits and discloses that it has filled the hole on its balance sheet with expensive loans from the Federal Reserve and Federal Home Loan Bank.
- April 21, 2023: First Republic Bank’s shares drop by nearly 50% in one day following the earnings report.
- April 24, 2023: First Republic Bank announces that it has lost around 10% of key staffers in the wealth-management division and that business has grown quieter since the banking turmoil started.
- April 27, 2023: JPMorgan announces that it has agreed to acquire First Republic Bank for $22 billion and will reopen all 84 of its branches.
- April 28, 2023: The FDIC announces that First Republic’s branches will reopen as part of JPMorgan during normal business hours and customers will have full access to their deposits.
- May 1, 2023: JPMorgan completes its acquisition of First Republic Bank, which will now operate as a subsidiary of JPMorgan.
The takeover of First Republic Bank by JP Morgan marked the end of an era for the bank, which had focused on serving America’s coastal elite. While the deposit run was a significant blow to First Republic’s reputation and financial stability, its merger with JPMorgan has put the bank on a path towards recovery.
The move will allow JPMorgan to expand its presence in California, where First Republic has a significant customer base. For First Republic customers, the merger ensures that they will continue to have access to their deposits and accounts, without any disruptions to their banking experience.
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