Everything you need to know about the purchase of First Republic Bank by JP Morgan

Founded in 1985, First Republic Bank is the third U.S. bank to fail this year, following the failure in early March of Silicon Valley Bank (SVB), the venture capital bank in San Francisco, California, and Signature, a New York-based real estate institution that had gambled with cryptocurrencies.

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J.P. Morgan rachète First Republic Bank

Placed up for auction by the FDIC (Federal Deposit Insurance Corporation, one of the banking industry's regulatory agencies), the bankrupt First Republic Bank was purchased by JP Morgan, a global financial services leader that provides solutions to the world's largest corporations, governments, and institutions. The banking industry was also rocked by the rescue of First Republic Bank by JP Morgan. Indeed, the American bank acquired a large part of First Republic: about $173 billion in loans and $30 billion in securities. However, it did not take over the corporate debts or the preferred shares.

In addition, the transaction implies that First Republic's loans must be revalued downwards and the agency in charge of guaranteeing deposits, the FDIC, has agreed to assume part of these losses.

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Reasons for First Republic's bankruptcy

Like Silicon Valley Bank and Signature Bank, First Republic (founded in 1985 by Jim Herbert) has failed. Based on the amount of assets held, it is the second largest bank failure in the history of the United States (excluding investment banks such as Lehman Brothers) after Washington Mutual in September 2008.

The American bank was specialized on an affluent clientele, to which it granted credits and real estate loans at preferential rates (whose value is considered lower than the market value). A business model that made its success, but which is now turning against it. Indeed, the flight of deposits caused by the mismanagement of Silicon Valley Bank has contaminated First Republic.

Two options were considered:

• Borrow at high prices to meet customer withdrawals.

• Sell assets but incur losses in a rising interest rate environment that eroded their value. This could have triggered a further decline in the bank's share price and a loss of deposit shares, which would have contributed to an increasingly difficult situation to manage.

Putting an end to the banking crisis

The bank came under intense pressure after two other institutions with similar profiles, Silicon Valley Bank and Signature, failed in proximity in early March. These institutions were seized by regulators due to massive withdrawals by customers concerned about their ability to survive.

With this buyout, J.P. Morgan (like the U.S. authorities) hopes to stop the bleeding and put an end to the banking crisis that has been hitting the United States since March. Indeed, since March, 11 major American banks, at the initiative of JP Morgan, have deposited $30 billion at First Republic Bank to avoid a new hemorrhage, notably a sudden drop in stock markets. Despite this lifeline, the markets reacted in the same way. In sum, First Republic's market capitalization, which had reached $40 billion by November 2021, fell below $0.6 billion in Friday's trading.

Reopening under a new name

As part of the transaction, First Republic Bank's 84 offices in eight states will reopen as branches of JPMorgan Chase Bank. Last week, the Federal Deposit Insurance Corporation (FDIC) announced in a statement that "All First Republic Bank depositors will become depositors of JPMorgan Chase Bank, National Association, and will have access to their full deposits." In short, the FDIC will continue to insure deposits, which means that customers do not have to switch banks to receive deposit insurance coverage, which remains valid up to the authorized limits.

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