After a weekend considering their options, federal regulators took over the troubled San Francisco–based First Republic Bank early Monday morning and sold most of its operations to JPMorgan Chase, in what amounts to the second-largest U.S. bank failure ever. (The biggest was Washington Mutual in 2008.) This was a somewhat predictable endpoint for First Republic after a weekslong slog of pulled deposits, lowered investor confidence, and gargantuan stock plunges. The closely watched regional bank, held aloft for a bit by rescue funds from larger financial institutions and the Federal Reserve, now joins several other regional banks that have taken hits from a changing, riskier macroeconomic climate.
As part of the deal, 84 First Republic branches in eight states will open as JPMorgan Chase outposts on Monday. Chase is taking on all FRB’s deposits—insured and uninsured—but the Federal Deposit Insurance Corporation, which brokered the deal, will share in the failing bank’s losses, the Wall Street Journal reported.
Whether First Republic’s death is ultimately a consequence of problems specific to the bank or an indicator of sectorwide peril will be hotly debated. It is undoubtedly a continuation of the chaos that flared up last month when the U.S. financial system was singed by a series of erupting powder kegs. In early March, the California bank Silvergate folded after its crypto investments proved unwise; Silicon Valley Bank then succumbed to the pressure of high interest rates and its particularly undiversified portfolio (mostly tech startups and wine), making for the largest financial-institution collapse in the country since 2008; and New York bank Signature likewise fell prey to a bank run, spurring the U.S. government to take over all three companies. Even though agencies like the Fed and the FDIC acted quickly to guarantee all these banks’ customer deposits, the whole fiasco sent shock waves in every direction, stretching as far as Europe—the megabank Credit Suisse had to be rescued by one of its Swiss rivals. Of the big banks still standing in the immediate fallout, First Republic was the hardest hurt; as I wrote back in March, the week following SVB’s fall also marked First Republic’s worst-performing week in its history, as shares tanked 62 percent and reached their lowest value in a decade.
It only got worse from there, even though both the Fed and a coalition of big banks provided tens of billions of dollars to help out First Republic. What happened?
It’s important to remember, as I noted at the time, that even though there was both public- and private-sector zeal to save First Republic, there was no guarantee the bank would make it through. The Wall Street Journal reported that bank executives and insiders (including, notably, a member of Congress) had sold millions of dollars of FRC stock throughout the year, with the bank’s chief credit officer dumping several shares the same week that SVB ate it. These transactions escaped wider scrutiny because First Republic wasn’t required to report them to the Securities and Exchange Commission, thanks to New Deal–era securities regulation. The heightened attention paid to FRC following its historic rout shifted wider perceptions of the bank’s health, with S&P Global downgrading its credit rating to “junk.” And in late March, when the Fed decided to keep raising interest rates while assisting the very banks that had been hobbled by those hikes, it became clear that macroeconomic conditions would not be favorable to a First Republic recovery—which closed out the month with its stock down more than 90 percent.
As analysts homed in on other indicators, concern merely heightened. Depositors kept cashing out their First Republic accounts, yanking about $100 billion from the bank’s holdings throughout the first quarter. The Wall Street Journal reported that the bank had excessively compensated its founder and his family to consult on the interest-rate risks it was taking on (the same ones, incidentally, that would land it in the doghouse). Early in April, First Republic suspended its dividend payouts. Plus, stock prices never recovered substantially from their March lows—by this Friday, they were down 97 percent for the year. And, as multiple observers noted, FRC’s business model was dependent on 1) wealthy customers whose account deposits far exceeded the FDIC’s $250,000 insurance limit, as well as 2) a strategy of handing out generous, low-interest mortgage loans whose values sank when interest rates rose. Nothing really there to reassure creditors.
The real deathblow landed last Monday, when FRC publicly released its first-quarter financial results. The showings were, let’s say, not promising. Seeking Alpha noted that the company’s revenue and profits had fallen year over year, and, even with the injection of funds from the Fed and from private banks, there was simply no viable revenue stream to make up for the losses—or to pay back the high-interest rescue funds—unless First Republic spun out its most valuable assets and outstanding loans. When FRC stock went down yet again after the disclosures, there came whispers of a potential federal-government takeover, since there weren’t many eager buyers left on the market. And the FDIC was not interested in simply granting First Republic more short-term loans. Anyway, the New York Stock Exchange was forced to halt FRC-share trades 12 times on Wednesday alone, due to the ensuing volatility, and to again halt FRC exchanges twice on Thursday morning. Friday saw another stock slide as it became clear all options outside of FDIC receivership were infeasible.
Now what? As reports trickled out of an impending bank failure, First Republic customers likely spent the weekend fretting over their funds, and wondering which big bank would come to the rescue. Now they can breathe easy, as long as they have no problem being a Chase customer. And the Fed will likely cite this latest fiasco when lobbying for the banking-regulation changes it outlined in its recent postmortem on the fall of SVB and Signature Bank, in which smaller banks escaped the scrutiny that larger institutions received from regulators (among many other problems).
What the entire saga demonstrates is that, more than six weeks after SVB’s implosion, the system is still smarting from the fallout. It’s not a contagion. But all along, there was still one more ticking time bomb.