First Republic Bank, the institution that had been on the verge of collapsing for weeks finally did so this week. The bank’s assets were seized by U.S regulators and then promptly sold off to JP Morgan Chase. First Republic had been struggling with liquidity issues ever since the collapse of Silicon Valley Bank (SVB) following a bank run. A subsequent run on First Republic’s deposits saw the institutions share price plunge dramatically. And as the bank held on for dear life, even as other banks rallied round, it was unable to stave off the inevitable.
Perhaps for First Republic the writing was always on the wall. Meanwhile, the deal seems to have stopped the contagion spreading to other banks. However analysts now believe this may be a clear indication that a recession is on the way in the US.
Teetering on the Brink
For months, First Republic had been teetering on the brink of collapse, but other banks and US regulators had tried to help keep the bank afloat. The problems began in early March when three banks folded. Silicon Valley Bank, and Signature Bank imploded amid social media- fueled bank runs that threatened to spread across the US banking sector. As a result, First Republic lost a cool Billion dollars in March alone following the collapse of SVB. As customer deposits began to flow out of First Republic in their billions, other members of the banking sector decided to act. First came reassurances from Regulators that the U.S banking system was sound. This was while other regional banks wobbled too.
Other banks, led by JPMorgan, then rallied round to lend First Republic $30 Billion to try and shore up confidence in the faltering bank. The institution then limped along through April until this latest bombshell.
JPMorgan to the Rescue Again
In the deal, JPMorgan will assume First Republic’s remaining $90 billion in deposits. The arrangement also lets JPMorgan purchase the majority of First Republic’s assets, namely $30 billion in securities and over $170 billion in loans. However, the Federal Deposit Insurance Corp. (FDIC) will take a share of FR’s losses with JPMorgan. This is believed to be to the tune of $13 billion each for the two parties. The bank also has to pay $10.6 billion to the FDIC) in order to take control of the San Francisco-based bank’s assets. This will give it access to First Republic’s coveted wealthy client base. In rescuing First Republic’s assets, JPMorgan will also receive financing worth up to $50 billion from the FDIC. The £30 billion in deposits from other banks in the earlier rescue deal will also be repaid.
JPMorgan, already the biggest bank in America, now owns both First Republic and Washington Mutual.
Concern For the Broader Banking Sector?
The collapse of First Republic Bank increases concerns about other members of the sector. While regulators and other banks in the US have tried to contain the fallout from the crisis, it seems to continue its inexorable creep through the industry. The same issues have so far taken down SVB, Washington Mutual, and Signature, as well as Credit Suisse in Switzerland. While some market watchers are expressing concern other analysts maintain that this is a contained issue specific to a certain type of business model of which First Republic was a proponent of. This involved unsecured deposits at attractive interest rates, then using that money to fund property mortgages for the wealthy.
The trouble really began as central banks around the world began raising interest rates in a bid to bring down inflation. This meant that suddenly First Republic was facing a liquidity crunch with the depositors demanding higher interest rates in return for their savings. Rising interest rates also meant that the bank was now making losses on its low interest loans.
The worrying thing is that First Republics collapse means that three of the U.S.’s four biggest bank failures have now occurred in the last two months! First Republic ranks only second to 2008’s collapse of Washington Mutual. SVB and Signature come a close third and fourth in that list. First Republic held $230 billion in assets before March. So as another bank is rescued or has its most valuable assets picked off, the question remains; what next for the US banking sector?