Regional Bank Stocks Plunge as Gloom from First Republic Failure Sinks Markets

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

A day after U.S. financial regulators ordered First Republic Bank closed and JPMorgan Chase agreed to take it over in a rescue move, other regional bank stocks have plunged.

In early trading on Tuesday, regional bank stock indexes fell sharply amid persistent jitters following Monday’s regulatory decision to seize First Republic and then facilitate its sale to JPMorgan, marking the second-biggest bank failure in U.S. history.

As of 1 p.m. ET, the S&P Regional Banks Select Industry Index was down 7.24 percent, the KBW Nasdaq Regional Banking Index was down 6.22 percent, and the iShares U.S. Regional Banks ETF was down 6.35 percent.

Several individual regional bank stocks saw far sharper declines.

Shares of California-based PacWest Bancorp, for example, crashed by over 35 percent, and by 1 p.m. shares were still down by 25 percent, with intense volatility triggering circuit breakers multiple times to halt trading temporarily.

Western Alliance shares also saw several trading stoppages as they fell around 20 percent, while New York-based Metropolitan Bank stock was down nearly 19 percent by 1 p.m.

While the catalyst for the carnage is unclear, it comes hot on the heels of Monday’s announcement by the Federal Deposit Insurance Corporation (FDIC) that First Republic Bank was being subjected to a “resolution”—or orderly liquidation process—after the bank experienced an unprecedented run on its deposits.

Following the recent failures of both Silicon Valley Bank (SVB) and Signature Bank, spooked depositors pulled around $100 billion from First Republic, putting immense pressure on its balance sheet.

Key Transaction Details

Under the terms of the resolution, the FDIC (acting as receiver) entered into a purchase and assumption agreement with JPMorgan Chase, which agreed to buy all of First Republic’s estimated $74.4 billion total deposits, including $54.7 billion in insured deposits.

The FDIC said it will contribute around $13 billion to the deal from its deposit insurance fund to cover some of the cost of the transaction.

Had First Republic been allowed to simply fail (rather than be subjected to orderly wind-down proceedings with JPMorgan’s involvement), the FDIC would have been liable to pay out all $54.7 billion in insured deposits to First Republic customers. Instead, the FDIC will contribute a far lower sum of $13 billion to sweeten the deal.

At the end of last year, the FDIC’s deposit insurance fund had a balance of $128.2 billion.

The recent failures of SVB and Signature Bank depleted the FDIC’s deposit insurance fund by an estimated $23 billion. The additional $13 billion hit from the First Republic resolution would leave the deposit insurance fund with around $92 billion.

The FDIC also entered into a loss-share agreement with JPMorgan Chase on real estate loans purchased from First Republic, a move meant to to minimize disruption for loan customers and maximize recoveries. Under the terms of the deal, as disclosed by JPMorgan (pdf), the FDIC will cover 80 percent of any potential losses on single family residential mortgages and commercial loans.

Under the deal, JPMorgan will pay the FDIC $10.6 billion. It will also repay $25 billion in deposits made at First Republic by large U.S. banks as part of an earlier rescue maneuver that saw the five biggest banks (including JPMorgan) deposit $30 billion at First Republic to bolster its balance sheet as it experienced massive deposit outflows.

First Republic had around $233 billion in total assets and $105 billion in total deposits as of March 31, 2023, according to its latest earnings report (pdf). Insured deposits ($54.7 billion) amounted to around 73 percent of total deposits.

Under the terms of the takeover deal, depositors of First Republic have automatically become depositors of JPMorgan Chase and continue to have full access to their deposits.

The transaction makes JPMorgan Chase—already the nation’s biggest bank—even larger.

Consolidation Concerns

White House press secretary Karine Jean-Pierre was asked during a May 1 press briefing whether President Joe Biden was concerned about JPMorgan becoming bigger after its acquisition of First Republic and that it would increase corporate consolidation.

“FDIC has a statutory obligation to choose the path that is least cost to the Deposit Insurance Fund. And that’s what they did here,” Jean-Pierre said. “It was necessary to ensure continued resilience of the banking system and to do so at no cost to the taxpayers.”

She added that the Biden administration remains concerned about concentration practices across industries and seeks to promote competition in the banking sector.

“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,” she said.

Jean-Pierre added that the White House has encouraged the FDIC to exempt community banks from any special assessments—or extraordinary insurance premiums—that the FDIC imposes on banks to top up its deposit insurance fund following recent bank failures.

Dick Bove, the chief financial strategist at Odeon Capital, told Bloomberg that the deal would be great for JPMorgan but less so for smaller banks.

“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.”

While speaking at an event at the Rose Garden, Biden said he was satisfied with the First Republic resolution.

“I’m pleased to say that the regulators have taken action to facilitate the sale of First Republic Bank and ensure that all depositors are protected and that taxpayers are not on the hook,” he said.

“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 added.

JPMorgan CEO Jamie Dimon told analysts on a call that he believes the worst of the banking sector turmoil is over and that the overall banking system is stable.

“There may be another small one,” he added, referring to the prospect of more bank failures. “But this pretty much resolves them all,” he said of the acute liquidity issues facing the U.S. banking industry.

“This part of the crisis is over.”