On Monday, JPMorgan Chase & Co. announced its acquisition of First Republic from the Federal Deposit Insurance Corp. (FDIC) after regulators took control of the bank following a tumultuous period in which its stock had plummeted and depositors had withdrawn almost half their money.[0] JPMorgan acquired $173 billion of loans and $30 billion of securities in the deal, making it the second-largest bank failure in US history.[1] First Republic was one of the regional banks most affected by the loss of confidence in the banking sector, following the downfall of Silicon Valley Bank and Signature Bank in March and the subsequent panic among customers. Despite the $30 billion cash dump by 11 of the country’s biggest lenders in mid-March, which was meant to stabilize the bank, customers withdrew roughly $100 billion in deposits in March alone.[2] First Republic’s collapse marks the third of its kind among mid-sized banks since the sudden collapse of Silicon Valley Bank and Signature Bank, triggering a global crisis of confidence and putting other mid-sized banks at risk.
JPMorgan Chase CEO Jamie Dimon declared that “this part of the crisis is over,” a reference to the ripple effects from the collapse of Silicon Valley Bank.[1] However, concerns remain about the stability of numerous other mid-sized banks, and the FDIC estimates that the cost to its Deposit Insurance Fund of the First Republic collapse will be around $13 billion, considerably higher than the estimated $2.5 billion for Signature Bank but beneath the $20 billion estimate of resolving Silicon Valley Bank.[3] The FDIC has a priority claim on the bank’s assets, which must be fully reimbursed before the next class of creditors can get reimbursed.[4] Massachusetts Democratic Senator Warren[5] tweeted after the announcement that “The failure of First Republic Bank shows how deregulation has made the too big to fail problem even worse.[6] Congress needs to make major reforms to fix a broken banking system.”
The Federal Reserve is thought by some analysts likely to raise interest rates once more, which could put a disproportionate amount of pressure on mid-sized and regional banks — like First Republic — as they need to raise the rates on their savings accounts in order to lure in depositors from their competitors.[7] If the Fed did not follow through with the rate hike, it would startle markets and “lead more people to believe rates would go up in future periods.” The FDIC estimates that the final cost of the First Republic collapse will be determined when it terminates the receivership.
This situation confirms two old truths: banks, by their nature, are fragile institutions, potentially subject to runs by depositors that can poleaxe them in short order.[8] Whenever a big bank looks like it’s about to fail, the federal government usually steps in with guarantees or taxpayers’ money because of fears that an uncontrolled collapse could prompt panic and lead to an economy-wide financial crisis.[8] The collapse of First Republic highlights the need for reforms to fix the broken banking system.[9]
0. “What First Republic’s Sale to JPMorgan Means for Real Estate” The Real Deal, 1 May. 2023, https://therealdeal.com/national/2023/05/01/watch-breaking-down-first-republics-seizure-and-sale-to-jpmorgan
1. “First Republic Deserved To Die” New York Magazine, 1 May. 2023, https://nymag.com/intelligencer/2023/05/first-republic-deserved-to-die.html
2. “U.S. Banking System: The Great Consolidation” Statista, 2 May. 2023, https://www.statista.com/chart/29901/number-of-us-commercial-banks-and-branches/
3. “‘Other problems might be lurking’: Strategist is unconvinced by Jamie Dimon’s bank crisis comments” CNBC, 2 May. 2023, https://www.cnbc.com/2023/05/02/strategist-left-unconvinced-by-jamie-dimons-crisis-comments.html
4. “First Republic: What happens to deposits and shareholders now?” CBS News, 2 May. 2023, https://www.cbsnews.com/news/first-republic-bank-stock-deposits-shareholders-cbs-explains/
5. “Why JPMorgan’s deal for a failing bank has Elizabeth Warren upset” POLITICO, 1 May. 2023, https://www.politico.com/news/2023/05/01/jpmorgans-dimon-sparks-new-clash-over-too-big-to-fail-banks-00094735
6. “First Republic fallout: Democrats fume as regulators bail out yet another failed bank” The Hill, 1 May. 2023, https://thehill.com/business/3982091-first-republic-fallout-democrats-fume-as-regulators-bail-out-yet-another-failed-bank/
7. “Why the Fed will likely raise rates two days after First Republic failed” CNN, 2 May. 2023, https://www.cnn.com/2023/05/02/business/fed-rate-hike-banking-crisis/index.html
8. “Deregulating Banks Is Dangerous” The New Yorker, 1 May. 2023, https://www.newyorker.com/news/our-columnists/deregulating-banks-is-dangerous
9. “The Executives Who Got Rich While Their Banks Collapsed” The New Republic, 2 May. 2023, https://newrepublic.com/article/172339/executives-rich-first-republic-bank-collapse