Regional Bank Shares Take Beating After First Republic Collapses

A First Republic Bank location in Newport Beach, Calif., on May 1, 2023. John Fredricks/The Epoch Times

U.S. regional bank shares took a beating after the collapse of First Republic and its takeover by JP Morgan Chase & Co.

The Federal Deposit Insurance Corporation (FDIC) seized First Republic Bank in the second-largest bank failure in American history in what is also the third regional bank to fail this year.

Shares of several regional lenders tumbled on May 1, after JPMorgan’s announced acquisition of First Republic Bank, amid the worst crisis to hit the U.S. banking industry since 2008.

The crisis was triggered by the closure of Silicon Valley Bank and Signature Bank in March, which led to the mass withdrawal of deposits from smaller lenders, fueling fears of a liquidity crisis that could threaten the entire economy.

First Republic lost $100 billion in deposits in the March bank run but limped along for a few weeks after several of America’s biggest banks rescued it with a $30 billion deposit.

Now, those deposits will be repaid after the deal to acquire the bank closes, JPMorgan said.

Regional banks, which disproportionately have client deposits parked in interest rate-sensitive investment portfolios like mortgage bonds, have been facing difficulties since the Federal Reserve pursued an aggressive monetary policy to fight high inflation.

A sign for a First Republic Bank location is shown in San Francisco on April 25, 2023. AP Photo/Jeff Chiu, File

Many of their portfolios are now worth far less than what they were valued before the central bank raised its policy rates last year.

This also follows the major Swiss bank Credit Suisse being taken over by its rival UBS in March, in a major shock to the industry.

JPMorgan Chase Shares Rise

The KBW Regional Banking Index slipped 2.64 percent at the end of trading on May 1, with two of the large regional banks which failed to beat JPMorgan in the bidding for First Republic, registering the biggest declines.

The two bidders, PNC Financial Services and Citizens Financial Group saw stocks fall 5.2 percent and  5.7 percent, respectively.

Shares of JPMorgan Chase were up 2.13 percent on the Dow Jones, making it the biggest winner on Wall Street.

A deal was made between America’s largest lender and the FDIC to allow for an orderly failure of the San Francisco-based bank.

As part of the agreement, $10.6 billion will be paid to the FDIC in order to take most of the failed bank’s assets.

The federal regulator will also share losses with JPMorgan on First Republic’s loans.

The JPMorgan Chase headquarters are pictured in New York City on April 17, 2019. Johannes Eisele/AFP via Getty Images

JPMorgan further agreed to absorb First Republic’s remaining $92 billion in deposits, both insured and uninsured, and buy most of the bank’s assets, including about $173 billion in loans and $30 billion in securities.

The FDIC estimated that its insurance fund would take a hit of $13 billion in the deal.

JPMorgan is expected to receive $50 billion in financing from the FDIC, reported The Wall Street Journal.

First Republic Deal ‘No Surprise’

Earlier on May 1, JPMorgan Chase CEO Jamie Dimon announced that “this part of the crisis is over,” referring to the series of bank failures, while Bank of America analyst Ebrahim Poonawala told investors that the “forced sales of banks due to deposit flight” has come to an end due to the latest acquisition.

“At first blush we view this as a positive transaction for JPM and sentiment around bank stocks,” said Poonawala.

The takeover should boost JPMorgan’s private bank strategy by adding an “army of private bankers (and high net worth client relationships) on the U.S. West and East coasts.”

The deal did not surprise Poonawala, who said, “given that there were few banks, if any having the balance sheet and operations capacity (and the desire) to acquire FRC.”

Many other Wall Street analysts had expected the deal as well.

“This marks (the) second-largest failure on record. Still, unlike Silicon Valley Bank and Signature Bank, the FDIC had a buy waiting in the wings,” wrote analysts at Barclays.

The purchase of First Republic also gives JPMorgan a greater presence in Silicon Valley, where it has been trying to build a stronger relationship with tech executives and startup founders for years.

FDIC Violates Own Charter

A few analysts note that the FDIC decision to insure all bank deposits, regardless of size, ignores existing banking laws, rules, and regulations, like the Dodd-Frank Act, and may set a precedent for the future.

The agency’s pledge to structurally guarantee all deposits in the wake of the March crisis put it in a position it could not fulfill.

FDIC rules limiting the protection of bank deposits were waved by authorities in the wake of the SVB collapse and again with its approval of the JPMorgan deal with First Republic.

The FDIC’s inability to structurally guarantee all of the First Republic Bank deposits forced it to permit JPMorgan to exceed the legal deposit maximum, thus violating its own charter.

JPMorgan’s takeover of First Republic’s remaining assets, for example, exceeds the 10 percent U.S. deposit maximum for major banks, according to the regulations.

A move by a federal insurance corporation to capture or hold 1.5 percent of all banking deposits of up to $250,000 while absorbing the assets of two failed banks would have exceeded its total budget.

Reuters contributed to this report.