BREAKING: JP Morgan Chase buys First Republic Bank (FRC) for $16 billion amidst FDIC seizure
FDIC assumed receivership of First Republic Bank early, and sold the bulk of the banks deposits and assets to JPMorgan early Monday morning, ensuring the access to services for customers.
THE California Department of Financial Protection and Innovation (DFPI) closed First Republic Bank (FRC), and appointed the FDIC as receiver. This move was made in an attempt to prevent the failure of the bank after it had reported over a $100 billion decrease in deposits in the first quarter.
Shares started to tumble after its all time high of $222.86 in November of 2021, losing a whopping 36.42% of its value by January 2023, landing it at $141.69. Fast forward to April 28th, 2023, and the total losses on (FRC) from its all time high value equal a 97.52% loss in value.
This marks the second largest bank collapse in United States history, which comes on the heals of two of the largest bank failures in US history, when SVB and Signature Bank collapsed within days of each other, forcing regulators to seize them.
Notably, on March 27th, Reuters reported that First Citizens Bank is set to acquire $116 billion in SVB assets:
First Citizens will not pay cash upfront for the deal. Instead, it said it granted equity appreciation rights in its stock to the FDIC that could be worth up to $500 million -- a fraction of what Silicon Valley Bank was worth before it failed.
The FDIC will be able to exercise these rights between March 27 and April 14. How much cash it receives will depend on the value of First Citizens' stock.
First Citizens shares jumped 50%.
First Citizens will assume Silicon Valley Bank's assets of $110 billion, deposits of $56 billion and loans of $72 billion as part of the deal.
The FDIC said the $72-billion purchase of SVB's assets came at a discount of $16.5 billion.
Unsurprisingly, the faltering banking system sparked fears of a more severe banking crisis over the possibility of nation-wide run on banks. NPR reported that in the days following the collapses, smaller banks saw a record $119 billion dollar outflow of deposits, which will likely result in a reduction of bank lending.
As banks cut back on loans, it acts like a brake on the broader economy. That could help the Federal Reserve in its effort to bring down inflation. But the ripple effects are hard to predict.
"You want the economy to cool. You want inflation to come back towards the 2% target. But this is a profoundly disorderly way to do it," says Joe Brusuelas, chief economist at RSM.
And lenders aren't the only ones who are getting nervous. Bratton, the Houston contractor, has her own concerns about borrowing money in an uncertain economy.
"Even though I would love to have an extended line of credit, I also have to look at my books and say how much can I stomach sticking my neck out," she says. "I don't want to be stuck holding a bag if things flip on a dime."
Talking heads in the financial sector have been warning of potential economic downturn, highlighting the potential for a crisis akin to the 2007-2008 Global Financial Crisis. Despite the painfully obvious crisis we’re facing, other experts, many in the media, and members of Joe Biden’s administration have called for people to have confidence in the banking system, asserting that everything will be fine.
You really don’t have to be a financial analyst to understand that these words hold little value. Bank runs resulting in collapse are truly a self-fulfilling prophecy, where simply the fear of failure causes a wave of depositors to withdrawal their funds, leaving the banks with no money, and forcing them to seek funding from the private sector. If they fail to acquire the necessary capital to ensure depositor funds, the FDIC steps in and seizes the bank until it can find the funding necessary to re-open the bank and insure deposits are covered and can be withdrawn.
So, be forewarned...
There is no legitimate reason to believe we are on the back end of this crisis. I doubt First Republic Bank will be the last in a series of bank failures, and subsequent federal bailouts.