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FutureStarrCalifornia Bank Seized and Sold to JPMorgan Resulting in 1 Bank Failure
Regulators seized First Republic Bank early Monday and struck an agreement to sell it to JPMorgan Chase & Co, thus averting a possible collapse that could worsen the recent banking crisis. Federal Deposit Insurance Corporation announced its sale after seizing San Francisco-based bank First Republic and accepting a bid from JPMorgan Chase Bank for all or substantially all its assets. As part of this arrangement, its 84 branches will reopen as JPMorgan Chase Bank branches. 1. FDIC Seizes First Republic Bank On Monday, the Federal Deposit Insurance Corporation took action and sold First Republic Bank to JPMorgan Chase after high-stakes negotiations over the weekend dragged on, shocking investors and customers alike. The move by FDIC is intended to restore order to an uncertain banking system beset with rising interest rates and client deposits fleeing for safety. Investors had become increasingly alarmed at First Republic, a regional bank catering to wealthy individuals and companies in finance, technology, and healthcare industries. A collapse of First Republic would have raised fears that its exposure to rising interest rates or carrying too much risky debt had reached crisis proportions. A group of major banks contributed $30 billion to a San Francisco bank in March, but even that wasn't enough to stop deposits from leaving already. The bank reported that around 102% of their annual inflows had left its doors, roughly equivalent to half. "To ensure continuity of service for depositors, the FDIC entered into an asset purchase and assumption agreement with JPMorgan Chase Bank, National Association to acquire substantially all of First Republic's assets," regulators announced early Monday morning in a statement. First Republic will reopen under JPMorgan Chase with immediate access to funds; JPMorgan also assumed responsibility for loans exceeding FDIC protection limits of $250,000 which had previously been held back from depositors by First Republic. First Republic's problems have been compounded by the simultaneous closure of Silicon Valley Bank and Signature Bank earlier this month, which alarmed investors and depositors alike and led to withdrawals at other midsize banks. Following these events, regulators pressured banks to raise capital and shore up their balance sheets quickly. Coffey noted that the FDIC's seizure of First Republic Bank is a stark reminder of how deregulation has made the financial system more fragile, and called upon Congress to pass significant reforms that address too-big-to-fail institutions like First Republic. Both regulators acknowledged in separate reports that lax supervision contributed to Silicon Valley and Signature's collapses, prompting renewed criticism towards how they managed the situation. 2. JPMorgan Chase Buys First Republic Bank JPMorgan Chase is becoming even larger after regulators seized First Republic Bank and sold off some of its assets through an auction held over the weekend, with JPMorgan Chase winning. This move will cost the Federal Deposit Insurance Fund (FDIC) about $13 billion -- much less than when they had to bail out Silicon Valley Bank back in March. The FDIC announced Monday that it has assumed control of First Republic Bank and accepted JPMorgan Chase's bid "to assume all insured deposits, both insured and uninsured deposits, and substantially all the bank's assets," just days after this San Francisco lender reported losing $100 billion of deposits in the first quarter and saw its shares plummet. While this acquisition will likely reassure investors and restore faith in banking, it could also raise new concerns over JPMorgan and how its large banks are managed. Last March, the head of the FDIC acknowledged that lax supervision contributed to Silicon Valley Bank and Signature Bank failings and said more needed to be done to create a strong and healthy financial system. Analysts assert that First Republic's collapse demonstrates just how delicate the banking industry is and that further failures could follow suit in coming months or years. Much like subprime lender IndyMac in 2008, many recent bank failures appear to be caused by depositors withdrawing their money rapidly from failing institutions in a rush known as "bank runs." First Republic's problems stemmed from a similar occurrence but on an unprecedented scale and with severer implications. The lender had established itself throughout California with branches in Beverly Hills, Santa Monica and Napa Valley and offered loans to wealthy individuals and small businesses alike, such as multimillion-dollar home mortgages or commercial real estate investments. Bank of the West ran into trouble in mid-March when it reported losses on interest-only loans made to wealthy individuals. Since then, its stock had dropped 97% as investors became anxious over its state in the banking industry. Although larger lenders provided a $30 billion lifeline to ease investor fears and stave off collapse of this institution. 3. JPMorgan Chase Pays $10.6 Billion to FDIC JPMorgan Chase recently stunned the banking world when it announced it would purchase most of First Republic Bank after it was taken over by the FDIC, at an agreed-upon price of $10.6 billion. As part of this agreement, they will pay $10.6 billion to the FDIC as they avoid having to write off depositor funds while simultaneously recording an impressive one-time profit of $2.6 billion. This move recalls JPMorgan CEO Jamie Dimon's bailout of Bear Stearns and Washington Mutual after federal regulators ordered their acquisition by JPMorgan, when federal regulators requested JPMorgan take over Bear Stearns and Washington Mutual under federal scrutiny in 2008. Although experts caution that comparing First Republic's takeover with traditional bailout is too extreme, it may help calm the banking industry as a whole. Normally when a bank fails, the federal government takes over control of assets and depositor accounts before selling them to another institution. Over the weekend however, First Republic was quickly acquired by JPMorgan Chase with all 84 branches operating as normal upon its reopening this week as JPMorgan Chase. JPMorgan will leverage First Republic to expand its presence among affluent American customers and gain access to high-end commercial clients in Hollywood, Palm Beach and Greenwich Connecticut. JPMorgan can benefit from increasing deposits from high-income households while also having access to top-of-mind commercial clients in these three locales. JPMorgan will expand its balance sheet through this deal by acquiring the bank's $92 billion in deposits and $173 billion in loans and securities; however, the company did not assume its corporate debt or preferred stock obligations. As part of its deal, the FDIC reached an agreement with JPMorgan for loss-sharing on most acquired loans, providing 80% coverage over seven years for single family residential mortgages and five years on commercial loans made to finance real estate developments. The FDIC will get its funds from both sales and from insurance premiums paid into its system by banks to cover possible losses, bypassing Congressional appropriations altogether. Currently, its deposit insurance fund stands at over $128 billion which it draws upon via fees paid by other banks. 4. JPMorgan Chase Pays $2.6 Billion in Integration Costs First Republic Bank's takeover is an alarming reminder of how prevalent Too Big to Fail remains in America and must be treated as such by its financial institutions. A potential wave of bank failures could create even bigger crises than we just experienced - Silicon Valley, Signature and now First Republic have already gone bankrupt suggesting many regional banks may have forgotten (or deliberately disregarded) basic risk management practices at banks. JPMorgan Chase announced Monday it had won the auction of First Republic assets, purchasing $273 billion worth of loans and $30 billion worth of securities as well as taking on $92 billion of deposits at First Republic. JPMorgan will pay $10.6 billion to the FDIC as part of the deal which they claim will create $500 million annual profit excluding one-time costs. JPMorgan Bank received an advantageous deal in its acquisition of First Republic's assets at a deep discount to book value, with many investments eligible for write off and no significant impact to its capital cushion. Furthermore, FDIC losses will be shared across most mortgage and commercial loan books at First Republic as part of this acquisition and regulator will offer a $50 billion five-year term loan facility to First Republic's assets. While JPMorgan will benefit from this deal, the government gains much as well. Instead of taking on the risk associated with saving an unprofitable bank and protecting depositors themselves, they'll avoid having to bear this responsibility themselves and preserve the financial system as a whole in times of stress. But this move must serve only as a temporary solution; regulators need to address the dangerous trend of larger banks swallowing up smaller ones--Signature, Silicon Valley and First Republic are prime examples that this trend must be reversed as soon as possible lest triggered crises may ensue due to waves of small or mid-sized bank failures.