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JPMorgan Buys First Republic's Assets in U.S. Auction

May 1, 2023
minute read

After regulators seized First Republic Bank (FRC.N), which has been in trouble since last weekend, JPMorgan Chase & Co. (JPM.N) announced Monday that it is buying the majority of its assets, marking the third failure of a major U.S. bank in the last two months.

The deal, which was struck after an auction, will see JPMorgan paying $10.6 billion to the U.S. Federal Deposit Insurance Corp (FDIC) for most of the assets of the San Francisco-based bank, which is the largest bank failure in the country since Washington Mutual in 2008.

As part of its plans to become the nation's biggest bank, JPMorgan is also entering into a loss-share agreement with the Federal Deposit Insurance Corporation (FDIC) to cover single-family homes, residential apartments, and commercial properties it bought, but will not take First Republic Bank's preferred stock or corporate debt.

It was agreed that the deal would enable First Republic to go out of business in an orderly manner, avoiding the need for regulators to cover all of the bank's deposits as they had to do in March when two other banks collapsed.

There was a lot of stress in the banking sector last week after the First Republic revealed that it had experienced more than $100 billion in outflows in the first quarter and was investigating options to deal with the situation.

The global banking industry has been rocked by the closures of Silicon Valley Bank and Signature Bank in March, while Credit Suisse (CSGN.S) was rescued by its Swiss rival, UBS (UBSG.S).

The share price of First Republic tumbled 43.3% in pre-market trading on Monday before it was halted. The bank's stock has lost 97% of its value since the beginning of the year. Shares of JPMorgan rose by 2.7% in the last trading session.

"It was easy to blame management for the problems when SVB was the only issue. However, when the pattern is seen, it is evident that the Fed has moved too fast and over the course and is damaging the economy," stated Thomas J. Hayes, Chairman and Managing Member, of Great Hill Capital.

In spite of calls for a pause following the turmoil in the banking sector in March, the Federal Reserve has been raising its benchmark interest rate steady since last year.

Using CME Group's FedWatch tool, the investors have priced in a 90% chance of another 25 basis point rate hike after the central bank's two-day policy meeting begins on Wednesday.

Several potential buyers, including PNC Financial Services Group (PNC.N), Citizens Financial Group Inc (CFG.N), and JPMorgan Chase and Co. were among the companies that submitted final bids on Sunday in an auction by U.S. regulators, sources familiar with the matter said.

In premarket trading, PNC shares were trading lower by 2.5%.

JPMorgan CEO Jamie Dimon
JPMorgan CEO Jamie Dimon

JPMorgan CEO Jamie Dimon

Stepping Up

First Republic has been taken over by the California Department of Financial Protection and Innovation, which will act as the receiver of First Republic, according to the Department of Financial Protection and Innovation.

There has been an estimate made by the FDIC that the cost to the Deposit Insurance Fund (DIF) would be approximately $13 billion. At the end of the receivership, the FDIC will be able to determine the final cost of the receivership.

As a result of the resolution, the U.S. Treasury Department welcomed it and said it would be done at the "least cost" to the DIF.

There will be a $25 billion repayment of the $30 billion that big banks deposited with First Republic in March by JPMorgan, according to the bank, which has assumed all of the bank's deposits. JPMorgan Chase will take on $173 billion in loans, $30 billion in securities, and $92 billion in deposits from the New York-based bank.

Upon acquisition of the businesses, JPMorgan's Consumer and Community Banking (CCB) Co-CEOs, Marianne Lake and Jennifer Piepszak, will oversee the operations of the businesses, according to a statement from the bank.

This rescue comes less than two months after U.S. lenders disappeared from the market due to a deposit flight, which forced the Federal Reserve to intervene with emergency measures to stabilize the markets. These failures came after Silvergate, a crypto-focused company, voluntarily liquidated its assets.

"We were invited by our government to step up, and we did just that," said Jamie Dimon, chairman and CEO of JPMorgan Chase.

"Due to our financial strength, our capabilities, and our business model, we were able to develop a bid to execute the transaction in a way that would minimize the cost to the Deposit Insurance Fund."

After the deal, JPMorgan expects to gain an estimated $2.6 billion in one-time, post-tax gains following the deal, which does not include the estimated $2 billion in post-tax restructuring costs that would be incurred over the next 18 months.

The bank is said to be "very well-capitalized", with the bank's common equity tier one (CET1) ratio being in line with its 13.5% target for the first quarter of 2024 while maintaining healthy liquidity buffers.

JPMorgan Chase Bank has announced Monday that 84 of the failed bank's offices in eight states will reopen as branches of the bank as of Monday. The bank has been on a buying spree since 2021, acquiring more than 30 companies in deals totaling more than $5 billion.

Regulatory authorities in the United States have been slow to approve large bank mergers in recent years, and the Biden administration has also taken steps to prohibit anti-competitive practices in banks.

Eric Ng
Eric Ng
John Liu
Editorial Board
Bryan Curtis
Adan Harris
Managing Editor
Cathy Hills
Associate Editor

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