Under the deal, which came after an auction, JPMorgan will pay US$10.6 billion to the US federal deposit insurance corp (FDIC) for most of the assets of the San Francisco-based bank, whose failure is the largest since Washington Mutual in 2008.
JPMorgan, already the biggest bank in the US, has also entered into a loss-share agreement with the FDIC on single family, residential and commercial loans it bought, but will not take First Republic Bank’s corporate debt or preferred stock.
The deal allows for an orderly failure of First Republic and avoids regulators having to insure all the bank’s deposits, as they had to do when two others collapsed in March.
First Republic disclosed last week that it had suffered more than US$100 billion in outflows in the first quarter and was exploring options, increasing stress in the banking sector.
Global banking has been rocked by the closure of Silicon Valley Bank and Signature Bank in March, while Switzerland’s Credit Suisse had to be rescued by rival UBS.
First Republic shares tumbled 43.3% in premarket trading today before they were halted.
The bank’s stock has lost 97% of its value this year.
JPMorgan shares rose 2.7%.
“When it was just SVB, it was easy to blame management. However, now that we see the pattern it is evident that the Fed has moved too far, too fast and is breaking things,” said Thomas J Hayes, chairman and managing member, Great Hill Capital.
The US Federal Reserve has been persistently raising its benchmark interest rate since last year, despite calls for a pause after the banking turmoil in March.
Investors have priced in a 90% chance of another 25 basis point rate hike after the central bank’s two-day policy meeting on Wednesday, according to CME Group’s FedWatch tool.
JPMorgan was one of several interested buyers including PNC Financial Services Group, and Citizens Financial Group Inc, which submitted final bids yesterday in an auction by US regulators, sources familiar with the matter said.
PNC shares were 2.5% lower in premarket trading.
Stepping up
The California FDIC said it had taken possession of First Republic and the FDIC would act as its receiver.
The FDIC estimated in a statement that the cost to the deposit insurance fund (DIF) would be about US$13 billion.
The final cost will be known when the FDIC ends the receivership.
The US treasury department welcomed the resolution, saying it was done at “least cost” to the DIF.
JPMorgan has assumed all of the bank’s deposits, it said, and will repay US$25 billion of the US$30 billion big banks deposited with First Republic in March.
New York-based JPMorgan will take on US$173 billion of loans, US$30 billion of securities and US$92 billion of deposits.
The acquired businesses will be overseen by JPMorgan’s consumer and community banking (CCB) co-CEOs, Marianne Lake and Jennifer Piepszak, it said in a statement.
The rescue comes less than two months after a deposit flight from US lenders forced the Fed to step in with emergency measures to stabilise markets.
Those failures came after crypto-focused Silvergate voluntarily liquidated.
“Our government invited us and others to step up, and we did,” said Jamie Dimon, JPMorgan chairman and CEO.
“Our financial strength, capabilities and business model allowed us to develop a bid to execute the transaction in a way to minimise costs to the DIF.”
JPMorgan said it expected to achieve a one-time, post-tax gain of approximately US$2.6 billion after the deal which did not reflect an estimated US$2 billion dollars of post-tax restructuring costs likely over the next 18 months.
It said the bank would be “very well-capitalised” with a common equity tier one (CET1) ratio consistent with its 13.5% first quarter 2024 target and keep healthy liquidity buffers.
The failed bank’s 84 offices in eight states will reopen as branches of JPMorgan Chase Bank from today, it added.
JPMorgan has been on a buying spree since 2021, acquiring more than 30 companies in deals totalling more than US$5 billion.
US regulators have been slow to approve large bank deals in recent years, while the Biden administration has also cracked down on anti-competitive practices.