First Republic: the difference with other recent bankruptcies – 02/05/2023 – Market

While the collapse of the SVB (Silicon Valley Bank) on March 10 helped trigger the implosion of the First Republic on Sunday night (30), US regulators took a markedly different approach to cleaning up the mess this time around.

When SVB went bankrupt in March, the FDIC (Federal Deposit Insurance Corporation), the agency that manages bank failures in the United States, closed it down in the middle of a business day before finding a potential buyer. That meant it had to create a so-called bridge bank run by regulators until it brokered an SVB sale more than 15 days later.

Fears about what would happen to SVB customers with deposits above the $250,000 level covered by federal insurance sparked runs on several other banks. This forced the Biden administration to declare SVB and Signature, another lender that failed around the same time, to be a systemic risk, allowing the government to guarantee all deposits.

First Republic, on the other hand, had been teetering for weeks, and the FDIC was able to put the bank into receivership and quickly negotiate a deal with JPMorgan to take over all deposits, including accounts with high balances.

This is the FDIC’s preferred handbook for closing banks.

JPMorgan will pay the regulator $10.6 billion, while the FDIC will provide JPMorgan with a five-year fixed-term loan of $50 billion. The agency estimates that the settlement will cost the insurance fund $13 billion.

Why was JPM authorized to buy First Republic?

Under normal circumstances, JPMorgan, the largest US bank, would be prohibited from buying First Republic on competitive grounds. US regulators are not authorized to approve any settlement that results in an institution holding more than 10% of insured deposits in the US.

JPMorgan was already above that limit.

However, the regulators had an obligation to sell the bank to the party that made the best offer to the FDIC. A person briefed on the transaction said JPMorgan “was given a waiver because it was by far the best deal.”

The final decision to waive the rules was made by the Office of the Comptroller of the Currency, an independent agency of the US Treasury that ensures creditors comply with laws and regulations, according to Jeremy Barnum, JPMorgan’s chief financial officer.

Was this a “private sector” solution?

Not exactly. While government fingerprints are harder to find on the First Republic than on other recent bank failures, it would be wrong to argue that it was resolved by industry alone.

Jamie Dimon, chief executive of JPMorgan, said on Monday that his institution moved from advisor to buyer of First Republic only after the government asked the bank to “step up”. And the final deal included the $50 billion credit line to JPMorgan, plus a loss-sharing agreement with the FDIC.

In addition, the bankruptcy and sale of First Republic to JPMorgan will result in a $13 billion loss for the FDIC. Had it not taken the hit, some depositors — including big banks that had deposited $30 billion in First Republic as part of an ill-fated bailout attempt — would have lost money.

JPMorgan said Monday morning it expects the deal to result in a slight immediate net gain for the lender. If he had completed a transaction without government assistance, he would have had to recognize billions of dollars in losses on day one.

Why did the Biden administration take a backseat?

In the weeks following the SVB and Signature bankruptcies, senior Biden administration officials grew increasingly confident that a flight of deposits from small and medium-sized creditors had begun to stabilize.

The First Republic was an exception that had to be dealt with. But the White House, Treasury and Federal Reserve – all heavily involved in the other two bank meltdowns – took a more neutral approach. Instead, FDIC regulators were firmly at the forefront of deciding the fate of the last bankrupt creditor.

Officials gambled that there was less risk of wider contagion this time around. Treasury did not need to invoke the system risk exception because all deposits were taken over by JPMorgan.

Less involvement by officials could help shield the government from any political backlash, including claims that the deal has further strengthened JPMorgan, a bank already considered too powerful by some leftist politicians and activists.

“All depositors are being protected, shareholders are losing their investments,” Joe Biden said at the White House on Monday. “Critically, it’s not the taxpayers who are on the hook.”

Were there many political consequences?

After the SVB implosion, Republicans criticized the FDIC’s decision to opt initially for a government-led solution and asked whether a bias against the growth of big banks helped prevent a sale.

So far, Republicans have been more complimentary about the First Republic resolution.

“I have long voiced concern over extensive taxpayer-funded government intervention, so I am pleased that the FDIC addressed my concerns and secured a private market solution for the First Republic,” said Tim Scott, Republican leader on the US Banking Committee. Senate.

Republican Patrick McHenry, chairman of the House Financial Services Committee, applauded the “quick work of regulators.”

Meanwhile, progressive Democrats used the failure of yet another US bank to bolster their calls for tighter regulation, including stronger capital and liquidity requirements. Sherrod Brown, Democrat, chairman of the Senate Banking Committee, said the collapse of the First Republic showed the need for “stronger protections”.

Progressive Democratic Senator Elizabeth Warren said the First Republic’s bankruptcy highlighted “how deregulation has exacerbated the ‘too big to fail’ problem”.

“A poorly supervised bank was bought by an even bigger bank – at the end of the day, taxpayers will be on the hook,” she added.