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First Republic has been shut down by US regulators in a surprise overnight deal, resulting in the second-largest bank failure in the country's history. JPMorgan Chase will acquire most of First Republic's assets, including $93.5B of its deposits, as well as paying the FDIC $10.6B.
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Jamie Dimon, the CEO of JPMorgan, has defended the administration's approach, stating that no one had expressed interest in acquiring First Republic as a going concern. This news caused stocks in US regional banks such as Citizens and PNC to decrease by more than 5% during morning trading. In response to the acquisition, the US Treasury department expressed its satisfaction that First Republic depositors were safeguarded, and that the cost to the FDIC's deposit insurance fund – which was estimated at approximately $13B – was minimized through the agreement with JPMorgan.
Why it matters
Following the intervention of the FDIC, JPMorgan entered into a five-year agreement to share the burden of unrealized losses stemming from First Republic's loan portfolio, caused by recent interest rate hikes. JPMorgan is set to acquire First Republic's $173B worth of loans and around $30B of securities, while avoiding the failed bank's corporate debt and preferred stock. Normally, JPMorgan, as the largest bank in the country, would not be permitted to acquire another lender due to controlling over 10% of American deposits, but regulators can make exceptions if necessary. With regulatory approvals already obtained, JPMorgan expects the acquisition to add approximately $500M to its annual earnings.
