First Republic Bank has been acquired by JP Morgan, and it appears that the cost of the acquisition will ultimately be borne by the taxpayers.
Focus Points:
- First Republic Bank Is Seized & Sold to JPMorgan in Second-Largest U.S. Bank Failure.
- JP Morgan added $18 billion in market capitalization following the very favorable deal.
- JP Morgan Chase got $50 billion loan from the FDIC at very low fixed interest rate.
- Taxpayers will cover the losses of $13 Billions.
- The Fed has borrowed an extra $206 billion to finance the FDIC.
On Monday, the Federal Deposit Insurance Corp. (FDIC) declared the closure of First Republic Bank. Customers who have deposited funds with the bank can still access their accounts. In a press release, the FDIC announced that all depositors of First Republic Bank will now become depositors of JPMorgan Chase Bank, and will have unrestricted access to their deposits.
Additionally, the FDIC confirmed that the deposit balances of the bank’s customers will continue to be insured up to the applicable limits, which are typically set at $250,000. As part of the deal, JPMorgan, the largest bank in the country, will take over all of First Republic’s $103.9 billion in deposits, including those that are uninsured, and acquire $229.1 billion in loans and $30 billion in securities.
FDIC will cover the $13 billion loss, while JP Morgan will receive the profits.
JP Morgan has reportedly profited significantly from its acquisition of First Republic, with an immediate gain of $2.6 billion and an estimated yearly profit of $500 million. In addition, the FDIC is providing significant support to JP Morgan, covering $13 billion in losses and providing $50 billion five-year fixed-rate in financing, due to concerns about potential bank failures and the need to maintain confidence in the banking system.
The US government has reportedly provided JP Morgan with loans to supplement their 20% internal rate of return (IRR) from their acquisition of First Republic Bank (FRC). The Fed has already borrowed an extra $206 billion to finance the FDIC’s rescue of SVB, Signature Bank, and First Republic Bank.
Mike Mayo: “What is the rate on the five-year loan from the FDIC?”
JP Morgan CFO Jamie Dimon: “Uh, Mike. I’d rather not disclose the specific rate. It’s at market financing is what I would call it. Fixed-rate”
What is Federal Deposit Insurance Corp (FDIC)
In the event of a bank’s failure, federal insurance ensures that customers can still access their funds, albeit limited to the insured amounts. The Federal Deposit Insurance Corporation (FDIC) confirms that deposit accounts, including savings and checking accounts, are typically insured up to $250,000 per depositor, per insured bank, and per ownership category. Ownership categories include “single” accounts and “joint” accounts with multiple owners.
Furthermore, credit unions provide federal protection through the National Credit Union Administration, with coverage also limited to $250,000 per owner, per insured credit union, and per ownership category.
As per their quarterly report, the Deposit Insurance Fund held $128.2 billion by the end of the last year.
Bending the Rules For Big Whales
In 1994, Congress passed the Riegle-Neal Interstate Banking and Branching Efficiency Act, which permitted banks to merge and expand across state borders with minimal restrictions.
However, to allay concerns about consolidation, Congress added a provision limiting the total share of the nation’s deposits that any one entity could hold to 10% and restricted the percentage within a state to 30%. The cap applied only to acquisitions, and the giant lenders that surpassed the threshold could continue to compete for new deposits through organic growth. When the law was passed, the giant banks held 16% of U.S. deposits. Over the next 25 years, their market share increased to nearly 59%.
Despite the establishment of state deposit caps that prohibited banks from accumulating more than 30% of deposits through mergers and acquisitions, the national deposit cap had several loopholes. A bank could exceed the cap if it acquired a failing institution or an entity organized as something other than a commercial bank, such as a savings and loan.
Both Bank of America and Wells Fargo were able to expand beyond the cap by taking advantage of these loopholes when they acquired failing institutions in 2008 and 2009.
Moreover, the cap applies only to deposits, not to various forms of wholesale financing that the big commercial banks and investment banks use for growth. Thus, the current cap is too large, and it could permit as few as ten banks to run the entire financial system.
The rules Following Silicon Valley Bank’s collapse in March, JP Morgan gained $50 billion in deposits from customers fleeing smaller lenders. Now, with the acquisition of First Republic, JP Morgan has taken on an additional $92 billion in deposits.
To enable the largest US bank to expand its operations further, authorities had to create a special exemption in Riegle-Neal Act. As JP Morgan already holds more than 10% of the nation’s deposits, it would technically have been disqualified from making further acquisitions. Nevertheless, authorities were willing to make an exception in this case, specifically urging JP Morgan Chase to submit a bid for First Republic Bank.
According to anonymous sources cited by The Wall Street Journal, the Federal Deposit Insurance Corp. opted for JP Morgan’s offer over a deal led by PNC Financial Services because it was expected to have the least impact on the deposit-insurance fund. While CEO Jamie Dimon claims that JP Morgan supports smaller banks, he acknowledges that consolidation in the banking industry is inevitable.
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