Banking shares plummet after First Republic takeover by JPMorgan

Beleaguered US lender First Republic Bank has been taken over by JPMorgan in a deal brokered by regulators on Tuesday.

JPMorgan paid US$10.6bn to the US Federal Deposit Insurance Corporation (FDIC) and First Republic Bank was shut down by the regulator. The bank had lost US$100bn in deposits as investors became spooked by ongoing turmoil in the US banking sector.

All 84 First Republic branches in eight US states have already reopened as JPMorgan branches, meaning the banking giant’s market share has now got even bigger. “The acquisition makes JPMorgan, already the nation’s largest bank, even bigger and could draw political scrutiny,” said the New York Times

First Republic Bank is one of three major US financial institutions to fail since March, in a banking crisis that has impacted some of the world’s biggest banks. 

The FDIC brokered rescue takeover deals for Silicon Valley Bank and Signature Bank in March in similar weekend-turnaround scenarios. The FDIC provides an incentive for investors by sharing the losses in a shared-loss agreement. The FDIC also guarantees deposits up to the value of US$250,000 – and above in some cases, like Silicon Valley Bank

The FDIC has proposed increasing the threshold for deposit insurance for businesses in light of recent events. In a statement, FDIC chairman Martin J. Gruenberg said: “Business payment accounts pose greater financial stability concerns than other accounts given that the inability to access these accounts can result in broader economic effects. In addition, business payment accounts may pose a lower risk of moral hazard because those account holders are less likely to view their deposits using a risk-return tradeoff than a depositor using the account for savings and investment purposes.”

The crisis rolls on

Bloomberg reported on Friday that shares in PacWest, First Horizon and Western Alliance had all dropped after the news of First Republic’s rescue deal. PacWest’s share price plunged by 51% on Thursday, and it has confirmed it is in talks with potential investors. Western Alliance dropped 38%: “It pared a drop of as much as 62% after saying a report that it’s exploring strategic options including a potential sale is ‘categorically false,’” said Bloomberg

Potential risks lurking

The US banking sector is being impacted by sharp interest rate hikes implemented by the Federal Reserve Bank to try to address rising inflation. But other risks to the sector are also lurking. The commercial property sector in the US has seen a drop in demand for office space since the growth of remote working post-Covid. This could pose a risk to banks for whom commercial real estate loans are a big part of their business. 

“Although more employees did return to offices in 2022, the outright level of remote work remains seven times higher than it was in the pre-pandemic era,” said JPMorgan Private Bank in an article on its website. “Layer on top of this the Federal Reserve’s historically rapid pace of interest rate rises over the past year, plus accelerating layoffs in professional and business services (e.g., in the technology sector) and the obsolescence of older office buildings, and it’s not hard to see pain in the office sector getting worse.”