Banking Regulators Seize Control of Banking Crisis Risk

by Wall Street Rebel - Michael London | 05/01/2023 12:13 PM
Banking Regulators Seize Control of Banking Crisis Risk

JPMorgan Chase reopens First Republic Bank after it was seized by regulators and sold to the company. As part of the agreement, 84 First Republic offices across eight states started operating as JPMorgan branches on Monday.


The unprecedented step taken by regulators on Monday to assume control of First Republic Bank and sell it to JPMorgan Chase was an attempt to end a two-month banking crisis that has shaken the financial system's stability.

After Washington Mutual, which collapsed during the financial crisis of 2008 and was also bought by JPMorgan, First Republic is the second biggest bank in the United States to fail based on its assets. Washington Mutual was the first.

First Republic was established in 1985 and was the fourteenth biggest bank in the United States as of the beginning of this year. However, the increase in interest rates had a negative impact on the bank's assets, and the firm battled to remain in business after two other lenders failed in March, which scared away depositors and investors.

The Federal Deposit Insurance Corporation (FDIC) announced the acquisition of First Republic and the sale of the company to JPMorgan hours before the markets opened in the United States. This came after a frantic weekend of activity by government authorities. JPMorgan took over 84 First Republic locations in eight states and reopened them as branches on Monday.

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The acquisition by JPMorgan was positively received by investors, resulting in a 3.5% increase in the bank's stock on Monday. The shares of PNC Financial Services and Citizens Financial Group, two regional banks that were unsuccessful in acquiring First Republic, experienced a decline of over 5 percent in their respective trading activities.

In accordance with standard practice, when a bank is placed under government receivership, the shareholders and debt holders of First Republic will experience a complete loss as a result of this transaction. The financial institution known as First Republic, along with its emblematic logo featuring an eagle in flight with its wings arranged in a V-shaped configuration, will be gradually discontinued, and the bank's physical locations will be transformed into JPMorgan Chase branches.

According to the Federal Deposit Insurance Corporation (F.D.I.C.), an estimated amount of $13 billion would be required from its insurance fund to compensate for the losses incurred by First Republic. According to JPMorgan's statement, the Federal Deposit Insurance Corporation (FDIC) will furnish the company with $50 billion in financing, and JPMorgan will remit $10.6 billion to the FDIC.

Mr. Dimon stated that the government invited individuals and other entities to take action, and they responded accordingly. According to his statement, the transaction aimed to reduce expenses for the Deposit Insurance Fund.

This move has already been subjected to censure by certain legislators. According to a research note by Ian Katz, an analyst at Capital Alpha Partners, regulators have made efforts to prevent the largest banks from gaining more dominance following the 2008 financial crisis. The expansion of JPMorgan is likely to elicit dissatisfaction from legislators across the political spectrum, with progressives who have opposed mergers and acquisitions as a means of consolidation being particularly aggrieved.

Despite receiving a $30 billion lifeline from 11 of the largest banks in the country in March, First Republic experienced failure. According to JPMorgan, the repayment of $30 billion will occur after the transaction is completed.

The government's nationalization and divestiture of First Republic occurred approximately two months after the government's acquisition of Silicon Valley Bank and Signature Bank. The collapse of the latter two institutions caused a ripple effect throughout the sector and instilled apprehension that other local banks may also be susceptible to deposit withdrawals.

According to several banking experts, the challenges faced by First Republic resulted from delayed repercussions from the March turmoil rather than indicative of a novel phase in the ongoing crisis. There is a prevailing sense of optimism among investors and industry executives that no other midsize or large lenders are currently at risk of experiencing imminent failure.

Similar to the two other banks that experienced insolvency, namely Silicon Valley Bank and Signature, First Republic Bank also succumbed to the burden of loans and investments that incurred significant losses amounting to billions of dollars in value. This was primarily due to the Federal Reserve's swift increase in interest rates as a measure to combat inflation. As soon as it became evident that the assets above had significantly decreased in value, a considerable number of affluent clients of First Republic, predominantly residing in coastal regions, expeditiously withdrew their funds while investors divested their shares.

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According to a research note by Timothy Coffey, a bank analyst at Janney Montgomery Scott, the rapid growth of First Republic and Silicon Valley Bank during a period of near-zero interest rates constitutes a cardinal sin. It is probable that there were additional individuals present. However, it is a very limited set of institutions as the vast majority of banks passed on picking up pennies in front of a steamroller.”

Notwithstanding, the financial system of the United States exhibits numerous issues. The confluence of bank failures and escalating interest rates have compelled banks to curtail lending, thereby impeding the growth of businesses and hindering the ability of individuals to acquire homes and automobiles. One of the contributing factors to the deceleration of the economy in recent months is attributed to this reason.

The First Republic's conclusion was marked by several weeks during which the bank and its advisors endeavored to rescue the institution or locate a purchaser that was not subject to government acquisition. However, the endeavors proved ineffective as several banks resisted acquiring the asset or its components without guarantees that they would not be burdened with substantial financial losses. Following the release of a concerning earnings report, wherein the bank revealed that over fifty percent of its deposits had been withdrawn by customers, it was evident that a government takeover was the only viable course of action. This realization was reached by the end of last week.

Towards the end of the previous week, the Federal Deposit Insurance Corporation (FDIC) initiated contact with various financial institutions, such as JPMorgan Chase, PNC Financial Services, and Bank of America, to solicit proposals for the acquisition of First Republic. According to sources familiar with the process, banks were requested to disclose the accommodations they would require from the government in order to proceed as part of the bidding process. The deadline for submission of offers by bidders was Sunday at noon.

The sales process was anticipated to conclude by Sunday evening; however, the announcement was made during the nocturnal hours. According to Mr. Dimon of JPMorgan, the bank allocated a workforce of 800 individuals to facilitate the deal within the past few days.

The banking crisis has placed federal regulators in a defensive position, as it has brought to light issues that experts believe should have been detected by government officials earlier, prompting them to compel banks to address them. Recently, the Federal Reserve and the Federal Deposit Insurance Corporation released reports wherein they censured themselves for their inadequate regulation of Silicon Valley Bank and Signature. The reports attributed the banks' poor performance to inadequate management and excessive risk exposure.

First Republic Bank catered to a significant number of customers in the startup sector, akin to Silicon Valley Bank, as well as in the financial industry, such as high-ranking bankers and hedge fund executives. A considerable number of the accounts possessed a balance exceeding the federal deposit insurance limit of $250,000.

Krishna Guha, who leads the global policy and central bank strategy team at Evercore ISI, suggests that the recent bank closure is likely to maintain the Federal Reserve's plan to increase interest rates by a quarter point during its upcoming meeting on Wednesday. According to him, it is possible that the removal of a persistent source of risk and uncertainty may facilitate the implementation of such a measure.

According to Guha, the banking issues have transitioned from an acute phase to a chronic phase. First Republic and other recent bank failures may prompt other lenders to adopt a more cautious approach toward lending to strengthen their positions.

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                       First Republic Bank sold to JPMorgan Chase to avert banking crisis

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