JP Morgan Chase, already the largest bank in the United States, just got even bigger Monday as the New York-based firm took over First Republic Bank following the lender’s seizure by government officials. The deal closes the books on the second-largest bank failure in U.S. history, which is also the fourth regional bank closure in the US since March. In total, JP Morgan will take on $173 billion of loans, $30 billion of securities and $92 billion in deposits from First Republic.
The acquisition was pulled together in collaboration with the Federal Deposit Insurance Corp. (FDIC) with the goal of securing a single buyer while minimizing the impact of any agreement on the government-backed insurance fund.
While the transaction will ultimately result in further consolidation of the U.S. banking sector— which Democratic leadership have long voiced opposition to—having a single buyer created a much “cleaner” scenario, stemming additional fallout that might arise from breaking First Republic up among multiple parties, sources told Bloomberg.
Along with acquiring First Republics loan and security assets, JPMorgan announced in a statement Monday that the FDIC agreed to share the burden of losses, as well as any recoveries, on First Republic’s single-family and commercial loans.
What made First Republic Bank different?
Worries about First Republic Bank’s long-term prospects date back at least to the failure of Silicon Valley Bank (SVB) in March, which was followed soon after by the closure of Signature Bank. Like First Republic, both SVB and Signature courted “elite” customers with very large cash balances—specifically, an outsized number of accounts exceeding the $250,000 deposit limit that’s covered by the FDIC’s insurance fund.
The lack of FDIC-backed protections were concerning on their own for First Republic, SVB and Signature alike. But that was only the start.
While First Republic was slightly larger than SVB and Signature, it also took a slightly unique approach to courting elite customers. The bank aimed to be its elite customers’ one-stop-shop for all banking products, helping finance business investments while even offering personal wealth management services.
As such, a smaller number of high-value customers fueled First Republic’s deposits, making the bank especially vulnerable in the face of a run.
When alarm bells began ringing back in March around SVB, First Republic customers were understandably on alert, and many began pulling funds from the bank to avoid seeing their assets frozen (ala many SVB customers in the immediate fallout of their bank’s demise).
Lack of “sticky” accounts put First Republic at risk
While some may call First Republic a “boutique” bank, it was actually slightly larger than SVB before both firms saw their stock values plummet and ultimate closure. By favoring an elite customer base (with almost two thirds of all accounts exceeding FDIC insurance limits), however, First National lacked what bankers call “sticky accounts” to ensure the firm’s holdings in the face of a run on high-value deposits.
As such, it was not altogether surprising when First Republic announced during their May 1 quarterly earnings call that the bank had lost upwards of $100 billion in assets—or 40 percent of all the bank’s deposits—over the previous three months as top-tier customers fled the institution.
Additionally, while First Republic had much fewer uninsured accounts compared to SVB—roughly 60 percent at the former versus 94 percent for the ladder—First Republic had an exorbitant loan-to-deposit ratio of 111 percent at the end of 2022. This meant that the bank had been lending out more money than it had in its coffers.
Bonds, interest rates fueled the runoff
Another big factor in all of the recent bank closures was a dip in the value of US-backed bonds, which both First Republic and SVB were seeing significant losses on before ultimately closing shop.
While the value of these bonds is prone to fluctuate alongside interest rates, a dip in a bond portfolio’s value isn’t necessarily a problem for banks unless they are forced to sell them to cover losses elsewhere—whether that’s money lost from poor investments, or a decline in deposits.
Dropping bond values along with a lack of “sticky” accounts created a perfect storm for First Republic—but actually offers some lessons for borrowers hoping to avoid being caught in a high-profile banking crisis.
Ace among these tips? Diversifying sources of capital so that if one lender falters, businesses ‘have their eggs in multiple baskets,’ so to speak.
To help businesses manage an unexpected liquidity crunch, we’ve compiled an actionable list of steps that founders can take today to ensure their runway isn’t cut short in the face of rocky financial markets.
Learn more about our Strategies for Managing a Liquidity Crisis on the blog or reach out to the Boast AI team today to learn more about non-dilutive funding strategies to fuel your R&D.