JPMorgan Chase’s Takeover of First Republic: What to Know

A worker cleans windows at a First Republic Bank office in San Francisco, Calif., on May 1, 2023. Justin Sullivan/Getty Images

JPMorgan Chase will acquire most of First Republic Bank’s assets for $10.6 billion after U.S. regulators seized control of the embattled institution and facilitated its sale over the weekend.

President Joe Biden and JPMorgan Chase CEO Jamie Dimon reiterated that the worst of the crisis is over.

“These actions are going to make sure that the banking system is safe and sound, and that includes protecting small businesses across the country who need to make payroll for workers and their small businesses,” the president said at the White House on May 1 during an event celebrating National Small Business Week.

While Dimon thinks another small bank failure could happen, he told analysts on a call that purchasing First Republic “pretty much resolves them all. This part of the crisis is over.”

The verdict is still out if the banking turmoil is over. But the latest development does provide several takeaways.

The First Republic Business Model

The California-based financial institution, which became the second-largest bank failure in U.S. history, mirrored the same business model as Silicon Valley Bank and Signature, offering preferential rates to appeal to high-income clients.

It revealed in January that the median single-family home loan borrower had access to cash of $685,000. This made the bank vulnerable because about two-thirds of its deposits were uninsured.

Moreover, like SVB, its investment portfolio and loan book lost their value as the Federal Reserve launched its inflation-fighting quantitative tightening campaign and began raising interest rates. First Republic began accumulating paper losses, with gross unrealized losses in long-duration bonds soaring to $4.8 billion by December 2022, up from $53 million in the previous year.

In addition, about half of its loan book consisted of single-family residential mortgage loans.

Growing Deposits

JPMorgan Chase will assume First Republic’s deposit base, allowing all insured and uninsured clients to access their money. This means that America’s largest bank will have an additional $104 billion worth of deposits on the books. As a result, the institution’s deposits will be about $2.5 trillion, representing about 14 percent of the nation’s total deposits.

JPMorgan Chase CEO Jamie Dimon in Washington on April 9, 2019. Jeenah Moon/Reuters

But how did JPMorgan circumvent the so-called deposit cap when acquiring First Republic? The bank avoided the rule on a technicality because it was acquiring the company in receivership and offered favorable terms to the Federal Deposit Insurance Corp. (FDIC).

“Our government invited us and others to step up, and we did,” said Dimon. “Our financial strength, capabilities, and business model allowed us to develop a bid to execute the transaction in a way to minimize costs to the Deposit Insurance Fund.”

FDIC Proposal

The FDIC published a 76-page report recommending raising the insured deposit limit for businesses on a “targeted basis.” This backstop would offer more protection for business accounts, flexibility for the agency, and certainty in the financial system currently facing many risks.

“The recent failures of Silicon Valley Bank and Signature Bank, and the decision to approve Systemic Risk Exceptions to protect the uninsured depositors at those institutions, raised fundamental questions about the role of deposit insurance in the United States banking system,” FDIC Chairman Martin J. Gruenberg said in a May 1 statement.

Since the failures of SVB and Signature, there have been discussions to re-evaluate limits on federally insured bank deposits. Fed Chair Jerome Powell urged lawmakers in March to take another look at the deposit insurance program.

A sign in front of a First Republic Bank office in Oakland, Calif., on March 16, 2023. Justin Sullivan/Getty Images

Meanwhile, by taking First Republic into receivership over the weekend, the FDIC estimated it would cost the Deposit Insurance Fund (DIF) approximately $13 billion. But the final cost will be tallied when the FDIC ends the receivership. This will be in addition to the roughly $23 billion hit the DIF took when rescuing Silicon Valley Bank and Signature Bank.

Is the Banking Sector Shrinking?

The White House was asked during the May 1 press briefing if Biden is concerned about JPMorgan becoming bigger after its acquisition of First Republic.

“But more broadly, no recent administration has done more to promote competition, address concentration process across industries,” press secretary Karine Jean-Pierre told reporters. “We value the community bank model, which provides robust competition to larger banks and provide banking services to communities that might otherwise not get service.”

The White House refrained from clarifying what other banks submitted bids during the FDIC’s auction process. Reports had claimed that a dozen entities submitted bids, including PNC Financial Services Group.

With further consolidation in the financial sector, there has been a renewed spotlight on the shrinking number of U.S. banks.

According to FDIC data, a little more than 4,200 banks are operating in the United States today, down 71 percent from the 1983 peak of 14,469.

Dick Bove, the chief financial strategist at Odeon Capital, told Bloomberg that the deal would be great for JPMorgan but not so much for smaller outfits.

“It increases the ability of JPMorgan to wipe them out,” he said. “It is very good for JPMorgan, maybe a lot less good for American banking.”