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May 01, 2023 at 07:38 AM
What You Need to Know
- The bank will make a $10.6 billion payment to the FDIC and estimated it will incur $2 billion in related restructuring costs over the next 18 months.
- The deal means JPMorgan will take over First Republic’s assets, including about $173 billion of loans and $30 billion of securities, as well as $92 billion in deposits.
- Eleven U.S. banks had tried to keep First Republic afloat by pledging $30 billion of fresh deposits on March 16, but these and other efforts were not enough.
JPMorgan Chase & Co. agreed to acquire First Republic Bank in a government-led deal for the failed lender, putting to rest one of the biggest troubled banks remaining after turmoil engulfed the industry in March.
The transaction, announced in the early morning hours Monday after First Republic was seized by regulators, makes the biggest U.S. bank even larger while minimizing the damage to the Federal Deposit Insurance Corp.’s guarantee fund.
JPMorgan agreed to the takeover after private rescue efforts failed to fill a hole on the troubled lender’s balance sheet and customers yanked their deposits.
First Republic was the second-biggest bank failure in U.S. history, and the fourth regional lender to collapse since early March.
“This is getting near the end of it, and hopefully this helps stabilize everything,” JPMorgan Chief Executive Officer Jamie Dimon said on a call with journalists Monday. Regional banks that reported first-quarter results in recent weeks “actually had some pretty good results,” the CEO said. “The American banking system is extraordinarily sound.”
Nevertheless, bank lending will probably suffer for a time in the wake of the bank failures, Dimon said.
JPMorgan acquired about $173 billion of First Republic’s loans, $30 billion of securities and $92 billion in deposits. JPMorgan and the FDIC agreed to share the burden of losses, as well as any recoveries, on the firm’s single-family and commercial loans, the agency said early Monday in a statement.
New York-based JPMorgan was the only bidder that offered to take the entire bank off the the FDIC’s hands in the cleanest way, according to two people familiar with the decision.
That was more appealing for the agency than the competing bids, which proposed breaking up First Republic or would have required complex financial arrangements to fund its $100 billion of mortgages, said the people, who asked for anonymity to describe the private talks.
The other bids would have cost the FDIC several billion dollars more from its insurance fund, one of the people said.
JPMorgan’s stock rose 4.2% in early New York trading. Trading of First Republic was halted.
Industry Critics
The transaction makes JPMorgan even more massive — an outcome government officials have taken pains to avoid in the past.
Because of US regulatory restrictions, JPMorgan’s size and its existing share of the U.S. deposit base would prevent it under normal circumstances from expanding its deposit base further via an acquisition. And prominent Democratic lawmakers and the Biden administration have chafed at consolidation in the financial industry and other sectors.
JPMorgan expects to recognize a one-time gain of $2.6 billion tied to the transaction, according to a statement. The bank will make a $10.6 billion payment to the FDIC and estimated it will incur $2 billion in related restructuring costs over the next 18 months.
The $92 billion in deposits includes the $30 billion that JPMorgan and other large U.S. banks put into the beleaguered lender in March to try to stabilize its finances. JPMorgan vowed that the $30 billion would be repaid.
For the $173 billion in loans and $30 billion in securities included in the deal, JPMorgan and the FDIC signed the loss-sharing agreement to cover single-family residential mortgage loans and commercial loans, as well as $50 billion worth of five-year, fixed-rate term financing.
The FDIC and JPMorgan will share in both the losses and the potential recoveries on the loans, with the agency noting it should “maximize recoveries on the assets by keeping them in the private sector.” The FDIC estimated that the cost to the deposit insurance fund will be about $13 billion.
“We should acknowledge that bank failures are inevitable in a dynamic and innovative financial system,” Jonathan McKernan, a member of the FDIC board, said in a statement. “We should plan for those bank failures by focusing on strong capital requirements and an effective resolution framework as our best hope for eventually ending our country’s bailout culture that privatizes gains while socializing losses.”
