JPMorgan Chase & Co, the largest bank in the United States, has announced that it will purchase the majority of the assets of San Francisco-based First Republic, which was seized by regulators over the weekend. This comes as First Republic continues to face pressure after reporting first-quarter outflows of more than $100 billion. Following Silicon Valley Bank and Signature Bank, this is the third major US bank to fail in the last two months.
First Republic, formed in 1985 by James “Jim” Herbert, specialised in making big loans at low interest rates. Its business approach was designed to attract high-net-worth consumers by offering superior mortgage and loan rates, making it more vulnerable than regional lenders with less affluent clientele.
Because US deposit insurance only covers up to $250,000 per savings account, First Republic has a high level of uninsured deposits as a result of its growth strategy. Meanwhile, as the US Federal Reserve Bank raised interest rates, its loan book and investment portfolio became less valuable, limiting its ability to raise capital.
When the Fed began raising US interest rates to combat inflation in 2022, the First Republic began to accumulate paper losses. According to First Republic’s annual report, gross unrealized losses in the held-to-maturity investment portfolio, primarily government-backed debt, increased to $4.8 billion at the end of December from $53 million the previous year. Analysts and investors believed that First Republic’s paper losses ranged between $9.4 billion and $13.5 billion by March.
The JPMorgan transaction is anticipated to benefit First Republic’s depositors and some of its debtors, but it is unclear what will happen to the bank’s staff. As of December 31, First Republic employed 1,261 people.
The acquisition of First Republic’s assets is part of JPMorgan’s larger expansion strategy in California. The bank already has 47 locations in the state and plans to expand its footprint. The transaction is likely to close in the coming weeks.