First Republic Bank was seized by auditors and sold to JPMorgan, which, before the acquisition, already claimed 10 percent of all U.S. bank deposits, and is the biggest bank in the U.S. The failure was the second biggest banking failure in history, which follows the third and fourth biggest failures that happened in March of this year.
Immediately after the failure, bank stocks sharply moved down, with some banking shares dropping as much as 28%.
The move happened on Monday, May 1st, when regulators seized control of First Republic Bank and handed it over to the Federal Deposit Insurance Corporation, who then accepted a bid from JP Morgan to buy all the assets. The bank had $229 billion in assets at the time of the seizure.
According to JPMorgan CEO Jamie Dimon, they will make a “modest” $2.6 billion gain, but they will also have to spend $2 billion to complete the full restructuring and integration with his company.
What JPMorgan gains is $92 billion worth of customer deposits, as well as $173 billion outstanding loans.
In the deal, JPMorgan will give the FDIC $10.6. They will not assume the corporate debt or preferred stock. They will repay $25 billion of deposits made by other major banks into the now failed bank.
What JPMorgan gets is an immediate windfall of $2,6 billion and about $500 million net income increase. The FDIC will also provide 80% coverage for single-family residential mortgages over seven years and 80% coverage for five years on commercial loans.
First Republic seems to have specialized in large deposits and big loans at low interest rates. The average median single-family home borrower had cash assets averaging $685,000. This accounted for half of their business, making them vulnerable to high-interest costs. As the Federal Reserve raised interest rates, First Republic was accruing debt by having to pay shareholders compounded interest amounting to 19.5%, which is more than double the average.
What it has in common with the other banks that failed is a specialization in serving wealthy clients and large organizations. Non-profits and schools, for instance, accounted for 22% of its loans.
By the end of December, First Republic saw its gross unrealized losses grow from $53 million at the end of 2021 to $4.8 billion by the end of 2022.
There appears to be no cryptocurrency attached to this bank failure, which is a factor in the other two major banks failing.
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