After a prolonged death spiral, First Republic Bank was finally seized by regulators this morning and subsequently sold to JPMorgan. The deterioration of First Republic accelerated last week after a dismal first quarter report, but it was not very surprising that JPM was the ultimate rescuer – having telegraphed a lot of interest in the bank over the last couple of months. Billions in associated costs to the FDIC’s insurance fund will still flow downstream to America’s larger banks, but guaranteeing a buyer at this stage was extremely critical for the broader financial sector.
Since JPMorgan purchased the bank, minus its corporate debt and preferred shares, from federal regulators that seized the bank, and not shareholders, it remains to be seen what First Republic’s equity will be worth now that its been sold. That could complicate things for owners of other troubled banks, considering the ongoing turmoil in the sector should not be declared over yet.
Related ETFs & Stock: SPDR S&P Bank ETF (KBE), SPDR S&P Regional Banking ETF (KRE), JPMorgan Chase & Co. (JPM)
The deterioration of First Republic (FRC) accelerated rapidly last week, following a first quarter earnings report that painted a desperate picture. Though the bank disclosed it had $45.1 billion of cash and unused borrowing capacity, enough to cover more than double its remaining uninsured deposits, shareholder concerns were not assuaged. A subsequent -80% decline in their stock price throughout the week meant that a bank carrying roughly $330 billion in combined deposits and assets was valued at a market capitalization of just about $600 million. By mid-week, it was almost certain that First Republic would soon enter receivership and join the likes of Silicon Valley Bank (SVB) among those that have failed thus far in 2023.
As the weekend rolled around, reports broke about a joint private and public solution for the rescue of First Republic. Ranked as the 14th largest American bank at the end of 2022, FRC inherited the silver medal among US bank failures on Monday morning. First Republic’s collapse is now second only to Washington Mutual’s failure in 2008.
Final bids were reportedly placed by PNC and JPMorgan, with the latter winning out and receiving loss share agreements with the FDIC covering acquired single-family residential mortgage loans and commercial loans, as well as $50 billion of five-year, fixed-rate term financing. In addition to the support provided to JPMorgan, cleaning up First Republic’s failure will cost the FDIC another $13 billion. That money will be paid by the nation’s banks, which pay premiums to support the agency, and piled on top of a $23 billion hole in its insurance fund created by the collapse of…
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