JP Morgan Acquires First Republic as banking crisis continues

The banking crisis continues to gather steam as Californian lender, First Republic, is the latest bank to have been saved from the brink of collapse. 

The banking crisis continues to gather steam as Californian lender, First Republic, is the latest bank to have been saved from the brink of collapse. 

Amidst a week of scrambling by U.S. Regulators to secure takeover offers for the struggling bank, JP Morgan has jumped to the rescue of First Republic.

On Monday, 1st May 2023, the Federal Deposit Insurance Corporation (FDIC) announced it had sold AUD $140.9 billion of First Republic’s deposits, as well as the majority of its assets, to JP Morgan, while simultaneously closing the bank.

Shares of First Republic had plummeted 90% in March, which appears to have been triggered by the Silicon Valley Bank collapse. This also saw the bank lose more than $100 billion in deposits as clients withdrew funds out of fear their money was no longer safe.

Like SVB, First Republic is a California-based speciality lender, whose target market is affluent Americans, promising low-rate mortgages in exchange for leaving cash on-site.

First Republic is the 3rd U.S. bank to fail this year, along with SVB and Signature Bank. 

However, First Republic is the 2nd biggest bank collapse since Washington Mutual in 2008. 

Ironically, Washington Mutual was also seized by the FDIC and sold to, guess who, JP Morgan.

Using another example from the Global Financial Crisis, Lehman Brothers had $US600 billion worth of assets before it filed for bankruptcy in 2008 while First Republic had $US200 billion, before being acquired by JPM.

While there are growing signs of a global credit crunch akin to the 2008 GFC, JPM has played down those fears.

In a conference call, JPM boss, Jamie Dimon, said the U.S. banking system was “extremely sound”, that the sector was “getting near the end” of bank failures and that current banking conditions were “nothing like 2008 and 2009”.

Still, the U.S. Federal Reserve has conceded it “failed to take forceful enough action” in a detailed report, specifically with its supervision and regulation of Silicon Valley Bank. 

This has seen a move away from smaller lenders towards large financial institutions, traditionally seen as safe havens.

Whatever the case, it seems rising interest rates have been the largest cause of these major bank collapses, which have lowered the value of banks’ financial assets despite generally increasing their profitability. 

Past performance is not a reliable indicator of future performance.

 

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