The Federal Deposit Insurance Corporation (FDIC) has announced the closure of First Republic Bank — the latest US regional banking institution to fold under the pressure of waning customer and investor confidence.
To protect depositors, the FDIC has accepted a takeover offer by US banking giant JPMorgan Chase following a “highly competitive bidding process”.
As part of the deal, JP Morgan is set to assume full ownership of First Republic’s deposits, assets, and bank branches (84 branches located in eight US states).
This includes:
- approximately US$173 billion (AU$260.5 billion) of loans;
- approximately US$30 billion (AU$45 billion) of securities.
- approximately US$92 billion (AU$138.5 billion) of deposits, including US$30 billion (AU$45 billion) of large bank deposits, which will be repaid post-close or eliminated in consolidation.
The FDIC has stressed customers are not required to change their banking relationship in order to retain their deposit insurance coverage (totalling an estimated US$13 billion) up to applicable limits.
“Customers of First Republic Bank should continue to use their existing branch until they receive notice from JPMorgan Chase Bank [that] it has completed systems changes to allow other JPMorgan Chase Bank [branches] to process their accounts as well,” the FDIC noted.
The FDIC and JPMorgan Chase Bank have also entered into a loss-share transaction on single family, residential and commercial loans it purchased from First Republic Bank.
The institutions are set to “share in the losses and potential recoveries” on the loans covered by the loss–share agreement.
This aims to “maximise recoveries” on purchased assets by “keeping them in the private sector”, while also minimising disruptions for loan customers.
Additionally, FDIC has pledged to provide $50 billion (AU$75.2 billion) of five-year, fixed-rate term financing.
JPMorgan Chase Bank has also committed to assuming all qualified financial contracts, but is not, however, required to assume First Republic’s corporate debt or preferred stock
“Our government invited us and others to step up, and we did,” Jamie Dimon, chairman and CEO of JPMorgan Chase said.
“Our financial strength, capabilities and business model allowed us to develop a bid to execute the transaction in a way to minimise costs to the Deposit Insurance Fund.
“This acquisition modestly benefits our company overall, it is accretive to shareholders, it helps further advance our wealth strategy, and it is complementary to our existing franchise.”
The collapse of First Republic follows an aggressive investor sell-off of the bank’s shares in response to the release of its financial results over the first quarter of the 2023 calendar year, resulting in a 78 per cent plunge in its share price.
Last Monday (24 April), First Republic Bank reported a 13.4 per cent fall in revenue from US$1.4 billion (AU$2.1 billion) in the previous corresponding period to US$1.2 billion (AU$1.8 billion).
Net income slipped 33 per cent to US$269 million (AU$405.6 million), partly attributable to a 19 per cent slide in net interest income to US$923 million (AU$1.4 billion).
Notably, First Republic shed 35.5 per cent of its deposit base, from US$162 billion (AU$244.3 billion) as at 31 March 2022 to $104.4 billion (AU$157.4 billion).
According to First Republic, deposit flows stabilised as of the week beginning 27 March 2023, and remained stable through to Friday, 21 April.
As of 21 April 2023, deposits totalled US$102.7 billion (AU$154.8 billion), down 1.7 per cent from the close of the first quarter of 2023.
In an effort to restore confidence in its liquidity position, First Republic accessed additional liquidity from the Federal Reserve Bank, the Federal Home Loan Bank, and JPMorgan Chase & Co.
First Republic also committed to cutting operational expenses, which included downsizing its workforce by approximately 20–25 per cent over the second quarter of 2023.
Renewed banking stability fears are set to weigh on the US Federal Reserve’s monetary policy considerations, with the next Federal Open Market Committee (FOMC) meeting scheduled for Wednesday, 3 May.
At the last meeting in March, the Fed lifted the funds rate target by 25 bps to 4.75–5 per cent amid the initial shock to the US banking system following the collapse of Silicon Valley Bank, Signature Bank, and Silvergate Capital; and the demise of Swiss lender Credit Suisse.
In his post-meeting press conference, Fed chair Jerome Powell acknowledged continued inflationary pressures but said recent banking sector volatility would likely result in tighter credit conditions for households and businesses.
This, he conceded, could undermine the Fed’s long-term macroeconomic objectives, and would hence require a moderation of the central bank’s tightening bias.
“It is too soon to determine the extent of these effects, and therefore too soon to tell how monetary policy should respond,” he said.
“As a result, we no longer state that we anticipate that ongoing rate increases will be appropriate to quell inflation.
“Instead, we anticipate that some additional policy firming may be appropriate.”
FDIC acknowledges supervisory faults
News of the takeover of First Republic Bank came just days after the FDIC released a report relating to its supervision of Signature Bank in the lead up to its failure and subsequent acquisition by local peer New York Community Bancorp.
Conducted at the request of FDIC chair Martin J Gruenberg, the report identifies the causes of Signature Bank’s failure and assesses the FDIC’s supervisory program.
According to the review, the “root cause” of Signature Bank’s failure was “poor management”, linked to the board of directors and management’s pursuit of “rapid, unrestrained growth”.
This pursuit reportedly lacked “adequate risk management practices and controls appropriate for the size, complexity, and risk profile of the institution”.
“[Signature Bank’s] management did not prioritise good corporate governance practices, did not always heed FDIC examiner concerns, and was not always responsive or timely in addressing FDIC supervisory recommendations,” the FDIC noted.
“[Signature Bank] funded its rapid growth through an overreliance on uninsured deposits without implementing fundamental liquidity risk management practices and controls.”
Reflecting on the FDIC’s own supervision, the review noted the regulator conducted several targeted reviews and ongoing monitoring; issued supervisory letters and annual roll-up reports of examination (ROEs); and made a number of supervisory recommendations to address concerns.
However, the FDIC has conceded it could have “escalated supervisory actions sooner” and acknowledged the need for “timelier” and “more effective” communications with Signature Bank.
“The FDIC experienced resource challenges with examination staff that affected the timeliness and quality of [Signature Bank] examinations,” the FDIC stated.
“Maintaining safety and soundness requires effective challenge from the regulators and receptivity and responsiveness from the banks.
“In the case of [Signature Bank], the bank could have been more measured in its growth, implemented appropriate risk management practices, and been more responsive to the FDIC’s supervisory concerns, and the FDIC could have been more forward-looking and forceful in its supervision.”
