First Republic failure shows urgent need for deposit insurance reform
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First Republic failure shows urgent need for deposit insurance reform

JPMorgan has cleaned up in a deal that sees the regulators waive their own cap on 10% deposit ownership.

Photo: Reuters

“If regulators had been thinking of ways to enable a big bank to circumnavigate the consolidation rules, they couldn’t have done a better job.” Such is the verdict of one banker at a US regional firm after the news at the weekend that the Federal Deposit Insurance Corporation (FDIC) had taken over stricken lender First Republic and sold it to JPMorgan for a part payment of $10.6 billion.

JPMorgan, which outbid rival firms – understood to include Citizens and PNC – for First Republic, is paying $182.6 billion in cash and assumed liabilities. The deal will generate a one-time gain of $2.6 billion and it expects more than $500 million in profit per year from the acquisition. Shareholders in First Republic have been wiped out, but depositors saved. JPMorgan now holds more than $2.4 trillion in deposits. It has also gained access to First Republic’s enviable wealth-management client base.

It is the third US bank collapse this year, and comes hot on the heels of the US Federal Reserve publishing its report into Silicon Valley Bank (SVB). Just six weeks after SVB – and Signature Bank – went under in March, the US saw the collapse of a bank with $229 billion in assets – the second-biggest failure in history.

Regulators had little option but to waive rules on acquisitions…

This happened only a matter of weeks after the regulators patched together a coalition of large banks, led by JPMorgan, to inject $30 billion into First Republic.

At the time, one senior regional banker told Euromoney that stability provided by the large banks’ deposits was being used to run-off First Republic’s client base in a more orderly fashion than would have been possible in a crisis situation.

There were, he said, large backlogs of new account openings at some of the big banks – a direct consequence of the syphoning-off of First Republic’s wealth-management clients, which have been its priority.

And it was not only clients – staff were also being recruited. A steady flow of press releases has detailed teams exiting First Republic – the logos atop these statements include the likes of Morgan Stanley and UBS.

From bank run to jog

All the Fed really did with this temporary cash injection was slow the bank run to a jog, albeit still a pretty brisk one. The bank’s deposits fell 40%, or by $70 billion, to $104 billion in the first quarter of 2023, and net of this $30 billion, the bank had still lost more than $100 billion in deposits.

So, when First Republic’s Q1 results removed any hope of the bank making it through the crisis of confidence, what remained was far less interesting as an acquisition. Regulators had little option but to waive rules on acquisitions being allowed by banks that hold more than 10% of total deposits to get the best deal away.

The FDIC is covering $13 billion in losses and providing $50 billion in financing, while JPMorgan is not assuming First Republic’s corporate debt or preferred stock. Tellingly, JPMorgan expects no deterioration in its 13.5% CET1 ratio.

That looks like a pretty good deal – and it is. JPMorgan’s stock rose 3.9% in early New York trading.

Nerves are now fraying in the regional banking industry. New deposit insurance rules are urgently needed to help stabilize confidence. But this will require congressional legislation – something that even the most optimistic banker concedes isn’t going to happen in short-enough order.

Without increased deposit coverage, speculation about the next loser in the US regional banking sector will continue. There is, however, little speculation about who is the real winner in this instance.

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