What caused First Republic Bank to collapse?
However, in 2023, First Republic Bank collapsed amid a banking crisis triggered by a global recession, a credit crunch, and a wave of customer withdrawals. On May 1, 2023, the Federal Deposit Insurance Corporation (FDIC) announced that First Republic had been closed and sold to JPMorgan Chase.
First Republic had a high level of uninsured deposits. Meanwhile, its loan book and investment portfolio also became less valuable as the U.S. Federal Reserve bank raised interest rates, hampering its chances of a capital raise.
The most common cause of bank failure is when the value of the bank's assets falls below the market value of the bank's liabilities, which are the bank's obligations to creditors and depositors. This might happen because the bank loses too much on its investments.
In the case of SVB, SBNY, and FRC, a mixture of high exposure to rising interest rates and high levels of uninsured deposits (i.e., deposits that exceed the FDIC's $250,000 insured limit) proved to be their downfall.
Shares of First Republic were down more than 50% at one point during the session, hitting an intraday low of $2.98 per share. The stock has now fallen 97% this year, with most of the losses coming after investors lost confidence in the bank following the failure of two regional lenders in March.
JPMorgan Chase Bank will assume all the deposits of First Republic Bank, including all uninsured deposits and nearly all of First Republic's assets, state regulators said Monday, May 1.
Like SVB, First Republic blundered into trouble as the Federal Reserve began raising interest rates almost 14 months ago. It invested in long-term assets, such as home mortgages and government securities, when rates were low.
Generally, money kept in a bank account is safe—even during a recession. However, depending on factors such as your balance amount and the type of account, your money might not be completely protected. For instance, Silicon Valley Bank likely had billions of dollars in uninsured deposits at the time of its collapse.
If your bank fails, up to $250,000 of deposited money (per person, per account ownership type) is protected by the FDIC. When banks fail, the most common outcome is that another bank takes over the assets and your accounts are simply transferred over. If not, the FDIC will pay you out.
The Financial Services Compensation Scheme (FSCS) can pay out compensation to people who end up out of pocket because a bank or other financial services provider goes bust. It also helps people who lose money because of poor advice from a financial adviser who has since gone out of business.
Is it safe to keep my money in First Republic Bank?
The Federal Deposit Insurance Corporation (FDIC) was then appointed Receiver. To protect depositors, the FDIC entered into a purchase and assumption agreement with JPMorgan Chase Bank, National Association (N.A.), Columbus, OH, to assume all of the deposits and substantially all of the assets of First Republic Bank.
As JPMorgan chairman and CEO Jamie Dimon explained in a company press release: “This acquisition modestly benefits our company overall, it is accretive to shareholders, it helps further advance our wealth strategy, and it is complementary to our existing franchise.” In other words, no big deal.
- Washington Mutual (WaMu), Henderson, NV ($309 Billion Assets) ...
- First Republic Bank, San Francisco, CA ($229 Billion Assets) ...
- Silicon Valley Bank, Santa Clara, CA ($209 Billion Assets)
Like many other banks, First Republic had tied up its reserves in long-term assets when interest rates were low. That meant trouble in 2023, when the Fed funds rate shot up 5% to quell inflationary pressures because the value of these long-term securities decreased significantly.
The Vanguard Group, BlackRock Inc. and State Street Corp. were the top investors, in that order, in both First Republic and SVB Financial. The Vanguard Group may have lost almost $4.2 billion from the value of its investment when the bank's shares hit an all-time high of $219.16 on Nov.
Now that the bank has failed, those shares are pretty much worth $0. See, what actually happened with First Republic is that the federal government seized its assets and sold them to JPMorgan Chase. JPMorgan will take in all of the assets, like savings accounts, that were being housed at First Republic.
| Holder | Shares | Date Reported |
|---|---|---|
| ETF Managers Group, LLC | 240,033 | Mar 30, 2023 |
| Parallel Advisors, LLC | 19,725 | Dec 30, 2023 |
| Highlander Capital Management, LLC | 6,500 | Dec 30, 2023 |
| Avior Wealth Management, LLC | 1,641 | Dec 30, 2023 |
The FDIC had seized control of the bank over the weekend and auctioned it off. JPMorgan won that auction, and it's paying a cool $10.6 billion for the bank, but not without some guarantees. JP Morgan Chase CEO Jamie Dimon said the deal to rescue First Republic only modestly benefits his bank.
First Republic cut roughly 25% of its workforce before JPMorgan stepped in. Bank employees who are not being offered jobs at JPMorgan will get an additional 60 days of pay and benefits, the bank said. Additional payments to those being let go will be based on how long they worked at First Republic.
What happens if you own First Republic Bank stock?
What about First Republic's stock? The stock will be delisted. When a bank is seized by the government, its common shareholders are wiped out. In this case, First Republic shareholders, along with its debt holders, will not receive anything.
The shareholders are most likely wiped out. The stock has stopped trading as of Monday, and shareholders won't receive stock in JPMorgan, according to a JPMorgan spokesman. The New York Stock Exchange said on Tuesday that it is delisting First Republic's shares.
Still, the FDIC itself doesn't have unlimited money. If enough banks flounder at once, it could deplete the fund that backstops deposits. However, experts say even in that event, bank patrons shouldn't worry about losing their FDIC-insured money.
By law, after insured depositors are paid, uninsured depositors are paid next, followed by general creditors and then stockholders. In most cases, general creditors and stockholders realize little or no recovery.
Most of the cost will likely be covered by proceeds the Federal Deposit Insurance Corp. receives from winding down the two banks. Any costs beyond that would be paid for out of the FDIC's deposit insurance fund.
