First Republic Bank, a San Francisco-based bank catering to wealthy clients, has become the third bank to collapse this year. The bank had been under pressure since the collapse of two other US lenders last month, which sparked fears about the state of the industry. The failure of First Republic is the second-largest in US history and the third in the US since March.
In an effort to resolve any panic, regulators shut down the smaller bank and JP Morgan Chase took over. JP Morgan paid $10.6bn to the Federal Insurance Deposit Corp (FIDC), and the bank’s 84 offices in eight states will reopen as branches of JPMorgan Chase Bank from Monday.
According to news agency AFP, US officials contacted six banks before landing on America’s largest lender to come up with a rescue package. Jamie Dimon, chief executive of JP Morgan Chase, said that the government had “invited” the banking giant, along with others, to “step up, and we did”. He added that few other banks were at risk of such massive customer flight.
First Republic had an unusually high share of customer accounts holding more than the $250,000 guaranteed by the US government, which were at risk of leaving. It also had a big book of mortgages, which had been hurt by the sharp rise in interest rates last year. In recent weeks, worried investors have dumped shares. The sell-off accelerated last week after the firm admitted that customers had withdrawn roughly $100bn of deposits during the panic in March, more than anticipated.
Betsey Stevenson, professor of economics at the University of Michigan, said that First Republic did not have “systemic problems” but failed because customers panicked. The sale to JP Morgan was better than the alternative, she added. “It’s just not a good idea for a bank to have to liquidate everything over a weekend in order to meet the demands of their depositors,” she said.
JP Morgan will take on $173bn of loans, about $30bn of securities and $92bn of deposits from First Republic, it said in a statement. It said it hoped to retain First Republic customers and boost its wealth management business.
The failure of First Republic follows the collapse of Silicon Valley Bank (SVB) in March and the demise a few days later of another US lender, Signature Bank. The turmoil in the banking sector is seen as part of the fallout after central banks around the world, including the US, raised interest rates sharply last year. However, analysts have said the current situation does not appear to be a repeat of the 2008 financial crisis as there isn’t the same system-wide problem.