Reading Time: 3 minutes

Banking Crisis

As the American bank, First Republic Bank’s share prices began to tumble, US Regulators were forced to step in and take control. They have sold off the bank to another massive US bank.

First Republic Bank’s collapse is described as the second biggest bank failure in US history. The only larger bank failure in US history ever happened not that long ago, during the 2008 financial crisis when Washington Mutual collapsed.

This latest crises in the finance world comes in the wake of the collapse of two other midsize US banks within just two months. What a mess!

First Republic Bank Sold To The Highest Bidder

In a regulator sponsored effort to try resolve the turmoil and address international concerns about the health of the entire banking system, JPMorgan Chase (Bank) was offered and swiftly purchased all of the bank’s deposits and most of its assets.

 Interestingly, back in 2008 is Washington Mutual was also acquired by JPMorgan in a similar government-led deal.

Why Did First Republic Collapse?

Before this year, First Republic enjoyed a favourable position in the banking industry, catering mostly to very wealthy clients. They even used to serve warm cookies to their clients as the entered the bank.

Nice.


They seemed to be very stable and its business model of offering low cost mortgages and attractive savings rates to rich people (while encouraging them to invest in wealth management and brokerage accounts) was considered very successful.


The trouble really only revealed itself with the recent collapses of Silicon Valley Bank and Signature Bank where clients with large accounts quickly withdrew their funds.

This just highlighted how investors and clients react these days revealing their lack of loyalty during times of trouble.


Many consumer realised that their really big deposits with banks (such as First Republic) are more than would be covered by government insurance policies and so could be lost if things go wrong (which they have been recently).

‘nearly 70% of First Republic’s deposits were uninsured’

Apparently, nearly 70% of First Republic’s deposits were uninsured, (according to S&P Global Market Intelligence data analysis).

In an effort to hedge their bets and avoid liquidity issues from client withdrawals First Republic attempted to be smart and sell unprofitable assets and to lay off a decent chunk of their staff.

‘Investors and clients began to be concerned and withdrawals from the bank began to gather speed’


Investors and clients began to be concerned and withdrawals from the bank began to gather speed. This concerned investors who began to sell shares driving the values down.


The bank continued to take steps to show that they were able to handle the pressure but despite a $30 billion funding package from a coalition of banks, the bank continued to lose deposits and share value, eventually reaching a critical point.

‘That’s when US Treasury officials intervened’


That’s when US Treasury officials intervened, and began looking for bids from other banks to rescue First Republic. JPMorgan Chase, known for its wheeler dealer skills during crises, was asked if they were interested and …they were.

In the past, JPMorgan successfully reduced the impact of the 2008 banking crisis by acquiring Bear Stearns and Washington Mutual. They hoped to now do the same with First Republic and restore market confidence.

Lessons Learned

The sudden collapse of First Republic Bank and its subsequent acquisition by JPMorgan Chase highlight the vulnerability of financial institutions.

After all, just a few weeks back First Republic seemed like a well respected success story. A real example in the world of banking (much like Credit Suisse had been in Europe). The sudden collapse shows how thin the veneer really is.

While many depositors should get their funds back (the bank opened offices the next week and have been trading since) investors saw massive losses. It is important to know that when bank failures occur, typically there is usually nothing left for shareholders and junior debt owners.

‘four US banks have collapsed this year, resulting in over $54 billion in losses for investors’

This now means that four US banks have collapsed this year, resulting in over $54 billion in losses for investors. Still, the folks over at JPMorgan seem happy with their purchase and JPMorgan Chase’s Chairman (and CEO) Jamie Dimon, is saying that this part of the banking crisis “is now over”. While he is obviously motivated to say things like that, things may actually quiet down for a few days or weeks. Overall financial service companies share prices have been hurt by this latest collapse, especially in the US.

So, let’s wait and see what exciting things happen next.