The dramatic fall of First Republic Bank is a troubling example of the consequences of risky business practices and weak regulation. The bank was on the brink of collapse after the Silicon Valley Bank crisis, but was quickly rescued by the Federal Deposit Insurance Corporation (FDIC). Today, the FDIC announced that it was appointing JPMorgan as receiver, and that it would be selling off First Republic’s assets. This event serves as a warning to other banks that are struggling to maintain their stability: if you’re not properly protected, your customers could end up losing their money.
The assets and deposits of the American banking system are considerable, totaling over $330 billion in total. This includes a variety of accounts such as checking and savings accounts, money market investments, and CD’s. Additionally, there is a significant amount of holdings in government backed
The FDIC is acquiring First Republic Bank in order to protect depositors. The bank’s assets and deposits will be transferred to JPMorgan Chase Bank, National Association, Columbus, Ohio. This agreement marks the first time the FDIC has assumed a bank in response to a financial crisis.
The FDIC confirmed Tuesday that JPMorgan Chase is acquiring all of the assets and deposits of thr Federal Reserve Bank of New York, adding 84 offices in eight states to its business. The deal is estimated to cost the FDIC about $13 billion, with all depositors of FRB now customers of JPMorgan Chase.
Colorado-based Holtsman Mining Corp. is set to become the latest company to withdraw support from the embattled financial outfit, Federal Reserve Bank of Chicago. The company, which runs a gold and silver mine in northern Arizona, said in a statement Monday that it had decided not to renew its membership with the FRB Chicago “due to significant operational difficulties at our mine.”
Despite its wealth and stature, Silicon Valley Bank was unprepared for the burst of the tech bubble. As the industry began to implode, so too did SVB, leading to a crippling financial crash that wiped out many of its customers and left it vulnerable to First Republic’s entry into the market.
With a new funding round in place and its reserves at an impressive $70 billion, First Republic was well-positioned to ride out the SVB fiasco. Its larger rivals, however, were not so lucky. JPMorgan saw its assets plunge by more than 10 percent due to the illiquidity of the markets; meanwhile, HSBC announced it would be selling its U.K. operations to First Republic for a whopping £12 billion ($17 billion USD).
It appears that First Republic executives underestimated the risk associated with their company’s dependence on the SVB sector. This caused a rapid and widespread exodus of both customers and investors, which ultimately led to the company’s bankruptcy. Consequently, this experience may have led First Republic executives to rethink their strategy in order to reduce their vulnerability to adverse market conditions.
Although this move by the FDIC is a relatively quick one, it comes with some criticism. Many blame the U.S. regulators for not acting quickly enough before SVB’s collapse, and so this will cost the Deposit Insurance Fund an estimated $13 billion dollars. With the final cost still to be determined, this move may not be seen as completely successful by all
For what it’s worth, the FDIC has announced that it is entering into a loss-share transaction on single family, residential and commercial loans it purchased of the former First Republic Bank. The FDIC is the receiver, while JPMorgan Chase Bank and National Association will share in the losses and potential recoveries on the loans covered by the loss–share agreement.