First Republic Bank, a San Francisco-based bank that catered to wealthy clients, is the second-largest bank to fail in US history. Regulators seized it and sold it to JPMorgan Chase on Monday.
The bank faced mounting liquidity and profitability problems since the beginning of the year, as it struggled to cope with the rising interest rates and the fallout of the crypto market crash that affected several other banks.
According to the California Department of Financial Protection and Innovation (DFPI), First Republic had more than $301 billion worth of assets and around 7,000 employees at the time of its closure. It was only surpassed by Washington Mutual, which collapsed in 2008 and was also acquired by JPMorgan.
First Republic Bank Interest Problems
First Republic’s troubles began in January, when it reported a surge in its interest expenses, which increased by more than 2,000% year-over-year and 153% from the prior quarter. The bank’s earnings also missed analysts’ expectations, raising doubts about its financial health.
In March, two other California banks, Silvergate Capital and Silicon Valley Bank, failed due to their exposure to the volatile crypto sector. Signature Bank, a New York-based bank that also dealt with crypto clients, followed suit shortly after. These failures triggered a wave of deposit withdrawals and panic among customers and investors of First Republic, which saw its stock price plummet by 97% this year.
Cash Injection
In an attempt to save First Republic from collapse, a consortium of 11 major US banks injected $30 billion in uninsured deposits into the bank in mid-March, with the backing of the federal government. However, this move failed to restore confidence in the bank, which reported a 41% outflow in deposits in the first quarter of 2023.
On Monday, the DFPI announced that it had taken over First Republic and appointed the Federal Deposit Insurance Corporation (FDIC) as its receiver. The FDIC then accepted a bid from JPMorgan Chase to acquire the bank’s assets and liabilities.
JPMorgan is one of the few banks that already holds more than 10% of nationwide deposits, making it ineligible under US regulations to buy another deposit-taking institution. However, the authorities made an exception to this rule and allowed JPMorgan through, citing the need to prevent a global financial crisis.
Too Big To Fail – FDIC
The FDIC said all depositors of First Republic will continue to have access to their funds and that no depositor will lose any money as a result of the transaction. The FDIC also said it will cover any losses above the $250,000 limit for insured deposits.
First Republic was founded in 1985 and had more than 80 branches across California, New York, Massachusetts, Florida and other states. It specialized in offering personalized banking services to high-net-worth individuals, businesses and nonprofits.
First Republic Bank’s failure is the latest sign of the turmoil in the banking sector caused by the Fed’s aggressive interest rate hikes and the collapse of several crypto platforms. Analysts warn that more banks could face similar challenges in the coming months as the economic outlook remains uncertain.
