JP Morgan Lands Bankrupt First Republic Bank, Despite Regulation Against Single Bank Controlling More Than 10% Of U.S Deposits

First Republic Bank, whose collapse had been a matter of speculation since Silicon Valley Bank(SVB)'s collapse, went into receivership and was bought by JP Morgan. 

First Republic's failure led the Federal Deposit Insurance Corporation to auction off the bank, and JP Morgan emerged as the winner.

What Caused First Republic's Demise?

SVB's death caused panic among depositors of smaller regional banks, and the First Republic was no exception. 

First Republic and SVB were also outliers compared to other banks since most of their deposits were uninsured by FDIC, making them vulnerable to a run-on-the-bank scenario during a panic period. 

Insured FDIC deposits are relatively more sticky capital, and First Republic's uninsured deposits stood at 68 per cent (though lower than SVB's 94 per cent). 

The bank had seen a massive withdrawal of deposits, combined with trouble in its business of giving out mortgages. 

Banks like First Republic face losses on the asset side as interest rates rise, while they must pay higher interest to depositors and lenders to remain attractive. 

The First Republic had received support from both the government and other banks.

A number of big banks, including the acquirer, together deposited $ 30 billion into the bank to keep it afloat – right after the crisis. Yet, First Republic reported a $ 100 billion deposit withdrawal in April. Of the $ 30 billion put in by large banks, $ 25 billion would be paid back by JP Morgan, and its deposit would be eliminated.

Compared to SVB's collapse, First Republic's failure is less of a shock. The stock price decline over the last few months indicates that investors have been betting on a collapse for a while. The bank's stock price had collapsed by more than 90 per cent. 

Further, several other signs indicated that the bank was struggling despite the support from other banks and regulators. 

Last week was particularly important as the bank released a set of bad numbers, and the management's refusal to answer questions during the call indicated that matters were serious.

What's in it For JP Morgan?

Anti-trust concerns appear to have been forgotten as regulators across the globe try to stitch up deals to save banks from complete collapses. 

Currently, the US doesn't allow a bank with a 10 per cent deposit share nationwide to buy out another bank, a rule that has been overlooked to help the current deal pass through. The deal has several sweeteners as well.

For one, JP Morgan does not need to take over First Republic's corporate debt or preference shares. In addition, it will share some of the losses in First Republic's loan portfolio with FDIC to keep itself from landing into trouble.

The deal offers JP Morgan a chance to acquire another bank – something it was prevented from doing by law. It will also access First Republic's remaining deposits and loan books while a part of the losses are taken care of by FDIC. 

Further, it will rebrand some of First Republic's branches as JP Morgan wealth centres and the rest of the branches over time. The First Republic managed $ 289 billion in assets in its wealth management business. 

The FDIC would also provide $ 50 billion in financing for the business. Overall, JP Morgan will pay around $ 10 billion for an equity value of $ 18 billion ($168 billion in liabilities subtracted from $ 186 billion in assets). Some analysts expect this to be the end of mid-sized bank collapses in the US and expect the system to stabilise from here on.