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People pass the First Republic Bank headquarters in San Francisco on Monday, May 1, 2030. First Republic Bank was taken over by regulators early on Monday morning, becoming the second largest bank failure in U.S. History. They then sold its deposits and assets to JPMorgan Chase Bank to prevent further financial turmoil in the U.S.
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First Republic Bank's headquarters in San Francisco is seen on Monday, May 1, 2030. First Republic Bank was seized by regulators early Monday morning, becoming the second largest bank failure in U.S. History. They then sold its deposits and assets to JPMorgan Chase Bank to prevent further financial turmoil in the U.S.
First Republic Bank is the second regional bank to collapse in a matter of weeks, with assets exceeding $200 billion. First Republic Bank was similar to Silicon Valley Bank which the government seized on March 10. Both banks catered to wealthy clients which may have contributed to their demise. The business model of the bank made it vulnerable to an unexpected rise in interest rates.
Investors have been wondering who will be next since the collapse of Silicon Valley Bank and Signature Bank on the same weekend. First Republic was quickly at the top, but investors were worried about other banks, such as Comerica or KeyCorp. These two also had a large number of accounts that exceeded the federally insured level of $250,000.
First Republic Bank: What you need to know
Why did First Republic fail?
First Republic grew quickly through deposits from wealthy companies and individuals. First Republic used these deposits to make large mortgages and jumbo loans when interest rates were historically low in the hopes that it would then convince customers to expand to more profitable products such as wealth management.
The bank had many accounts with deposits that were well above the $250,000. After Silicon Valley Bank failed, customers withdrew their money out of fear that their deposits would be in danger. First Republic reported last week that more than $100 billion in deposits had been withdrawn by depositors, the majority of which occurred during a few short days mid-March.
In a note sent to investors, Timothy Coffey wrote that 'too many First Republic customers' showed their true loyalty was to their fears.
The value of the large loans in First Republic's accounts also dropped as the Federal Reserve raised interest rates rapidly last year. If the bank sold the loans in order to raise capital it would lose money. Silicon Valley Bank had also been doomed by similar circumstances.
First Republic had plans to sell unprofitable assets including mortgages with low interest rates that it offered to wealthy clients. It announced plans to cut up to 25% of its workforce (which totaled around 7,200 employees) by the end of 2022. Analysts deemed these plans to be too little too late.
It was clear by the middle of last weekend that government intervention in First Republic would be necessary. Treasury officials asked banks for bids on First Republic. Bankers and regulators spent the weekend trying to find a solution.
What bank or banks are next?
Analysts expect that the banking system won't be hit by any other large bank failures for the time being, as the problems with Silicon Valley, Signature Bank, and First Republic are unique to these companies.
First Republic was not the only midsize bank to be hit hard. Other banks also suffered from large withdrawals and had to borrow money through federal programs in order to stabilize their balance sheets.
Comerica in Dallas, for example, reported that deposits dropped by $3.7 billion following the March 9th date and borrowed $13 billion through federal programs to "provide a buffer above normal operating levels." The company still earned $324 in the first quarter. This is down from the previous quarter but an increase from $189 in the quarter before.
Comerica's shares fell 37% the week following Silicon Valley Bank's failure, but they have been stable since. On Monday, shares fell almost 2%.
The shares of many midsize banks dropped Monday, though the losses were modest compared with the double-digit losses suffered by most of them on 13 March.
Krishna Guha, Evercore ISI, stated that the trading suggests little or no spillovers, which is consistent with the notion there is no shock with the acquisition of First Republic.
What happens to First Republic Stockholders?
First Republic stock closed at $3.15 Friday after trading at $115 the previous day. Around $20 billion of market value was lost. The stock was suspended before the U.S. market opened on Monday.
JPMorgan Chase has stated that it will not be taking on any corporate debt of First Republic or preferred stock.
Stockholders and bondholders get paid last after a bank fails. The FDIC doesn't give an estimate of how likely it is that any creditor will be repaid.
The agency said that the failure of First Republic could result in a loss of $13 billion for its deposit insurance fund.
Investors will likely not be able to recover their losses, even if conditions change in the future. Silicon Valley Bank stockholders and Signature shareholders were all wiped out.