W.chicken branch It was a JPMorgan Chase branch that opened on May 1st, First Republic Bank, the latest regional bank to bow in the face of US interest rate spikes.bank giant pounced In an auction arranged by the Federal Deposit Insurance Corporation, a troubled California-based lender (fdic), regulators, weekends. JPMorgan will underwrite all of his $100 billion deposit with First Republic. Bank mortgage and commercial loan losses are fdic.
The First Republic began to look vulnerable after its collapse Silicon Valley Bank (svb) March. Both banks have many depositors who are not covered by federal deposit insurance and are prone to fickleness. And many fled. First Republic’s deposit base collapsed in the first quarter of this year, from $176 billion at the end of 2022 to $104 billion at the end of March. Banks turned to high-value short-term borrowings, some of which came from the Federal Reserve’s emergency facilities. close the gap. The value of loans made in the era of low interest rates has plummeted, raising concerns about the ability to pay.
In short, First Republic faced a more extreme version of the problem faced by other lenders. Rapidly rising interest rates have hit American banks on both sides of the balance sheet. Their assets, in the form of loans and bonds, are depreciating thanks to high interest rates. Their liabilities, in the form of deposits, are becoming increasingly uncompetitive against highly liquid and secure American money market funds that offer yields of almost 5%.
The deal brings two peace of mind to the rest of the American banking system. The first is that the acquisition is not sudden. First Republic’s stock price fell 89% between March 8 and 20. svbSince then, the name has topped the list of lenders that investors worry about. When stocks began to plummet again after announcing dismal quarterly results on April 24, stocks of other American banks remained unperturbed, giving hope that the predicament would not be contagious.
The second point of reassurance is that the sale is arranged perfectly. This suggests that large banks are still seeing opportunities to acquire assets from struggling peers. An acquisition could also be a step towards a healthier industry. There are about 4,700 banks and other savings institutions in America. Some integrations never fail. This time around, the rule that banks with more than 10% of his national deposits can’t buy other lenders would have barred JP Morgan from making acquisitions, so it appears that the rule was waived in order to close the deal. is.
However, this reassurance applies to the banking industry as a whole and not to companies in a similar position. The first attempt to stabilize the First Republic came in March when several large banks, including JP Morgan, announced they would deposit $30 billion in the institution. Clearly, the vote of confidence was not enough to reassure investors and depositors. Despite its resilience in the final week of April, US regional bank stocks fell 30% from two months ago and haven’t recovered at all since. svbcollapse. Attractive yields on short-term government bonds held by money market funds will continue to be a source of pressure.
on the other hand, fdic The company’s deposit insurance fund estimates it will cost about $13 billion to facilitate transactions, on top of the $20 billion it lost after the financial collapse. SVB $2.5 billion when the undersigned bank went bankrupt. These losses account for more than a quarter of his $128 billion in deposit funds held at the end of 2022. When the fund runs out, banks may be forced to invest to replenish it.
The question now is how other midsize banks will respond to the pressure of rising interest rates, and what the economic damage will be. PacWest Bancorp, a lender in another region where stock prices have crashed, recently announced it was considering selling assets in response to deposit outflows. Tan Kai Xian of research firm Gavekal said increased asset sales by smaller banks meant fewer new loans and more conservative lending standards. America’s banking turmoil isn’t over yet. ■
https://www.economist.com/finance-and-economics/2023/05/01/first-republic-fails-and-is-snapped-up-by-jpmorgan-chase First Republic fails and is bought by JPMorgan Chase