First Republic Bank is seized by regulators and sold to JPMorgan Chase

Regulators took control of First Republic Bank and sold it to JPMorgan Chase on Monday, a dramatic move aimed at stemming a two-month banking crisis that has rocked the financial system.

First Republic, whose assets have been hit by the rise in interest rates, has been struggling to stay afloat after two other lenders collapsed last month, scaring depositors and investors.

First Republic was acquired by the Federal Deposit Insurance Corporation and immediately sold to JPMorgan. The deal was announced hours before US markets open and after a mess by officials over the weekend.

Later Monday, 84 First Republic stores in eight states will reopen as JPMorgan stores.

JPMorgan will “assume all of the deposits and substantially all of the assets of First Republic Bank,” the FDIC said in a statement. The regulator estimated that its insurance fund would have to pay out about $13 billion to cover First Republic’s losses.

“Our government called on us and others to get involved, and we did,” said Jamie Dimon, JPMorgan’s chief executive. He said the transaction was intended to “minimize the cost to the deposit insurance fund.”

First Republic failed despite receiving a $30 billion lifeline from 11 of the country’s largest banks in March. It will go down in history as the second largest US bank by assets to fail after Washington Mutual, which failed during the 2008 financial crisis.

The government takeover and sale of First Republic comes seven weeks after the government took control of Silicon Valley Bank and Signature Bank, whose failures sent a shockwave through the industry and raised fears that other regional banks were doing a similar thing rush for deposits would be exposed.

Many banking experts said First Republic’s troubles were a belated response to March’s turmoil rather than the start of a new phase in the crisis. Investors and industry executives are optimistic that no other mid-sized or large lenders are at risk of impending default. When First Republic shares plunged again last week, other bank stocks were little.

Despite this, the US financial system has many problems. Recent bank failures and rising interest rates have forced banks to restrict lending, making it harder for businesses to expand and for individuals to buy homes and cars. That’s one of the reasons why the economy has slowed down in recent months.

The $30 billion cash injection helped allay broader concerns about the banking system but did not allay concerns about the First Republic’s viability. The lender, founded in 1985, was the 14th largest bank in the United States earlier this year. Its shares lost almost all of their value after a relentless series of steep falls that began when Silicon Valley Bank faltered.

The end of the First Republic came after weeks in which the bank and its advisors tried to either bail out the bank or find a buyer outside of a government takeover. But the effort failed: other banks were reluctant to buy it or parts of the bank, without assurances they would not incur billions of dollars in losses. At least last week, after an alarming earnings report in which the bank revealed that customers had withdrawn more than half of their deposits, it was clear that there was no other option but a government takeover.

Late last week, the FDIC reached out to other financial institutions, including JPMorgan Chase, PNC Financial Services and Bank of America, to solicit bids for the First Republic. Bidders had until Sunday noon to place their bids. As part of the bidding process, the banks were also asked which parts of the bank they would not accept.

Like the other two failed banks — Silicon Valley Bank and Signature — First Republic collapsed under the weight of loans and investments that lost billions of dollars in value as the Federal Reserve quickly hiked interest rates to fight inflation. When it became apparent that those assets were now worth much less, First Republic’s wealthy clients, most of whom live on the coasts, began fleeing their funds as quickly as possible, and the investors sold their shares.

Last Monday, First Republic announced that customers had withdrawn $102 billion in deposits in the first three months of the year — well over half of the $176 billion they held at the end of 2022. They also said they had borrowed $92 billion, mostly from Fed and government-backed lending groups, and virtually acknowledged that they had to turn to financial industry lenders of last resort to keep the doors open.

The bank’s dismal results fueled only investors’ worst fears – that the Federal Deposit Insurance Corporation would have to take over the bank.

As of Thursday night, First Republic and its advisers knew they had no options other than taking over the government. The FDIC was working with financial advisory firm Guggenheim Partners on the process, according to three people with knowledge of the situation.

Federal agencies are in defensive mode. Last week, the Fed and FDIC issued reports criticizing themselves for not adequately regulating Silicon Valley Bank and Signature. The reports also blamed the banks for poor management and excessive risk-taking.

First Republic had many clients in the startup industry — much like Silicon Valley Bank — and in the financial industry, including high-profile bankers and hedge fund managers. Many of his accounts contained more than $250,000, the limit for federal deposit insurance.

The collapse of the First Republic could add to concerns about an economic slowdown. The upheaval that began with the failure of Silicon Valley Bank has made banks and investors more cautious, industry experts and economists say. And that caution could make it more difficult and costly to obtain credit and hamper the company’s expansion and hiring. The First Republic seizure and its aftermath could prompt the Fed to slow or suspend rate hikes if it thinks the collapse will prompt banks to tighten credit further.

Because of the type of clients it serves — a large proportion of them multi-millionaires — the bank’s executives often spoke about the security of its business model and growth. While its customer base rarely defaulted, the bank wrote mortgages when interest rates were very low and kept them on its books rather than selling them to investors. First Republic’s large portfolio of home equity loans has fallen in value each time mortgage rates on new loans have risen over the past year.

Other regional lenders, like Utah’s Zions Bank and Los Angeles’ PacWest, have been strengthening their positions faster than First Republic, and bank analysts see no more collapse than imminent. Shares of all other banks in the S&P 500 index rose on Friday, although shares in First Republic ended the day down more than 40 percent in anticipation of the government takeover.

This is an evolving story. Check for updates again.

Rob Copeland contributed reporting.

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