June 8, 2023


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US authorities acquire First Republic Bank – accepted an offer from JPMorgan Chase

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On Monday morning, it was announced that the US bank insurance fund, the FDIC, would acquire First Republic Bank, and that JPMorgan Chase would next buy the bank.

confirm it California Financial Conduct AuthorityIt is part of the United States government with decision-making responsibility for the First Republic, headquartered in San Francisco.

The agreement means that JPMorgan Chase will handle all of the First Republic’s deposits, totaling $93.5 billion. JPMorgan Chase will also take over most of the bank’s assets, worth $229.1 billion. The FDIC itself reports that.

On the other hand, JPMorgan Chase will not undertake lending to First Republic or the bank’s preferred stock.

It is not known what JPMorgan Chase paid for First Republic, but the FDIC describes the bidding round, in which many other large US banks participated, as “very competitive”.

Our authorities and others called on us to step in, and we did, says JPMorgan Chase CEO Jamie Dimon.

This makes First Republic Bank the second largest bank failure in US history, after Washington Mutual, which collapsed during the 2008 financial crisis. Silicon Valley Bank, which collapsed in March, was somewhat smaller.

Sources close to the negotiations said the authorities were intent on closing a deal for First Republic before the banks open Monday morning local time. This corresponds to late afternoon in Norway.

Specifically, the 84 First Republic branches will open Monday morning, but then as part of the JPMorgan Chase system. All First Republic depositors get access to their deposits through JPMorgan Chase, according to the FDIC.

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In a futures deal before the US stock market opens on Monday, JPMorgan Chase rose just under three percent. First Republic’s share fell 33%.

FDIC incurs losses of $13 billion

First Republic had hoped to negotiate an agreement without putting it under administration, but that was not possible.

All bids received were with the condition that the FDIC cover some potential losses from the First Republic purchase, possibly through FDIC acquiring the majority of First Republic’s bond portfolio.

One of the things that made First Republic unattractive as a buy is what Bloomberg points out “mountain” of loans entered into in the past, low interest rates, as well as an unusually large portfolio of low-rated mortgages for wealthy clients. Both parts have fallen in value after the sharp rise in interest rates last year, as you can now get a completely different interest income.

The bond portfolio is worth $30 billion, and contains an unrealized loss of about $500 million.

Part of the agreement between JPMorgan Chase and the FDIC is that FDIC will bear some of the losses from First Republic, and the FDIC itself calculates that it will have to incur a loss of $13 billion as a result of the agreement.

Exceptions to US law

JP Morgan, for its part, is one of a small group of giants in the US banking market with a market share of more than 10 percent. That in and of itself makes JP Morgan a foundation not allowed To make acquisitions of other “medical enterprises” – intellectual banks.

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This was a result of legislation introduced after the financial crisis, but the fact that a First Republic takeover is imminent means that US authorities have made an exception. America’s largest bank is now even bigger.

Bloomberg reported that JPMorgan envisions the acquisition providing a one-time gain of $2.6 billion after tax. This does not include the $2 billion restructuring costs that JPMorgan Chase expects over the next 18 months.

“This acquisition contributes somewhat positively to JPMorgan Chase as a whole, creates value for our shareholders, helps improve our asset management strategy, and complements our existing franchise,” Jamie Dimon sums up.

In a statement, JPMorgan said it expects it to continue to be “extremely well capitalized” and with “healthy” precautionary liquidity.

Jamie Dimon, CEO of JPMorgan Chase.

Jamie Dimon, CEO of JPMorgan Chase. (Photo: Misha Friedman/Getty Images)

The quarterly report gave new insight

The bidding process comes after the banks and their advisers discussed potential bids and acquisitions for weeks, without coming to fruition.

This is why over the weekend US authorities asked banks to bid, after First Republic shares fell to new lows this week. This is after a quarterly report that gave new insight into how the bank actually stands.

The report gave investors and authorities new insight into how much damage the bank had already been hit by the banking crisis in March, which culminated in the collapse of the Silicon Valley bank and UBS’ forced takeover of Credit Suisse.

The bank’s management declined to answer questions about providing quarterly numbers, but did make comments about high redundancies and the search for “strategic alternatives.” The share price then plummeted, and within days rumors of government intervention began circulating.

Regulatory authorities do not usually react to stock prices. But this time it suddenly fell. The bank has become a zombie institution, John Bobo, a former FDIC attorney and current partner at a financial advisory firm, told The Washington Post.

Bank for wealthy clients

At the end of 2022, First Republic was considered the 14th largest bank in the USA. The bank has long benefited from having wealthy individuals and their companies as clients, with a small degree of loan losses.

The Wall Street Journal previously reported that the bank made good lending at low interest rates to the wealthy, including a mortgage to Meta CEO Mark Zuckerberg.

At the same time, the deposits of many wealthy clients exceeded $250,000, which is the maximum amount of large deposits insured by the American Insurance Fund for banks.

As a result, the bank largely sat on uninsured deposits, which proved problematic.

First Republic Bank was in many ways the “next bank” in the crisis of confidence triggered by the collapse of the aforementioned Silicon Valley bank and cryptocurrency-based signature bank. Market participants became concerned about the bank’s large share of unsecured deposits, which would be a huge problem if suddenly the bank’s customers were to withdraw their deposits in large numbers – like Silicon Valley Bank.

First Republic Bank’s quarterly report showed that about 40 percent of all its customers’ deposits had been withdrawn by the end of the first quarter.(conditions)Copyright Dagens Næringsliv AS and/or our suppliers. We’d like you to share our statuses using links that lead directly to our pages. Reproduction or other use of all or part of the Content may be made only with written permission or as permitted by law. For more terms see here.