Regulators take over First Republic Bank and sell assets to JP Morgan

May 1 (Reuters) – Regulators seized First Republic Bank ( FRC.N ) and sold its assets to JPMorgan Chase & Co ( JPM.N ) on Monday, in a deal to resolve the biggest U.S. bank failure since the 2008 financial crisis. A line under the protracted banking turmoil.

First Republic was among regional US lenders hit by a crisis in confidence in the banking sector in March, when depositors panicked over the collapse of two other mid-sized US banks, causing a mass flight from smaller banks to giants such as JP Morgan.

The bank has languished since then, but investors fled again last week when it revealed plans to write off more than $100 billion in outflows in the first quarter and explore new options.

A week later, California regulators on Monday seized First Republic and placed it in FDIC receivership after selling off its assets, marking the third major U.S. bank failure in two months and the largest since Washington Mutual in 2008.

JPMorgan shares rose 2% on Monday, while shares of mid-tier banks fell and the KBW Regional Bank Index (.KRX) fell 2.7%. First Republic shareholders will be wiped out in the transaction, Wedbush analysts said. Shares of the bank fell 43.3% in premarket trading on Monday.

As part of a deal to pay JP Morgan US Federal Deposit Insurance Corp (FDIC) $10.6 billion, the San Francisco-based bank will control most of its assets and gain access to the First Republic’s coveted affluent customer base.

Jamie Dimon, JP Morgan chairman and CEO, also played a key role in the 2008 financial crisis.

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The deal would cost the FDIC’s deposit insurance fund about $13 billion, according to the regulator’s initial estimate.

U.S. President Joe Biden on Monday praised the deal for protecting depositors rather than footing the bill for taxpayers. He repeated his call for stronger banking regulation and supervision.

“These actions are going to ensure that the banking system remains safe and sound,” Biden said at a White House event. “Critically, taxpayers are not the ones on the hook.”

The White House praised the “decisive” steps taken by regulators to protect depositors and keep the banking system stable. White House spokeswoman Karine Jean-Pierre said the measures would also ensure accountability of the First Republic, which she called “grossly mismanaged.”

Too big to fail?

Analysts and industry executives said the deal — which saw several banks bid over the weekend after the FDIC conducted a bidding process — should calm markets. But this has come at a cost, they added: Big banks are getting stronger, while smaller banks are getting harder to do business with.

Dennis Kelleher, CEO of Better Markets, a Wall Street reform group, said the auction results in “unhealthy consolidation, unfair competition, an alarming increase in too-big-to-fail banks — all of which harm community banks, small business lending and economic growth.”

JPMorgan already owns more than 10% of the country’s total bank deposits. Wells Fargo said in a research note that JPM’s net deposits will increase by 3% as a result of the deal.

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“We need big, successful banks in the world’s largest economy,” Dimon told reporters on a conference call. “We have the ability to serve our clients—cities, schools, hospitals, governments. We bank the IMF, the World Bank. Anyone who thinks America shouldn’t have that can call me directly.”

Jane Fraser, chief executive of rival Citigroup, hailed the deal as resolving the last major source of uncertainty for the sector after a period of turmoil.

“Don’t stigmatize all the regional and small banks as one big problem,” Fraser told a conference.

“This is not a global financial crisis, this is not a savings and loan crisis. There will be stress, but let’s target it where it is.”

Rising rates

Global banking was rocked by the closure of Silicon Valley Bank and Signature Bank in March, a flight of deposits from U.S. lenders, forcing the central bank to take emergency measures to stabilize markets with Switzerland’s Credit Suisse ( CSGN.S ). Rival UBS ( UBSG.S ). Those failures came after crypto-focused Silvergate voluntarily liquidated.

Some have blamed years of aggressive monetary policy as the root cause of the crisis in the banking sector, following the U.S. Federal Reserve’s sudden reversal and rapid interest rate hikes last year.

“When it was just the SVB, it was easy to blame the administration. But now when we look at the system, it’s clear that the central bank is moving too fast, too fast, and breaking things,” said Thomas J. said Hayes, chairman and president. Managing Member, Great Hill Capital.

JPMorgan was among several interested buyers, including PNC Financial Services Group ( PNC.N ) and Citizens Financial Group Inc ( CFG.N ), which submitted final bids in an auction by U.S. regulators on Sunday, sources familiar with the matter said.

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JP Morgan accepted all of the bank’s deposits and will repay $25 billion of the $30 billion deposited at First Republic in March.

It added that the failed bank’s 84 offices in eight states will reopen as branches of JPMorgan Chase from Monday.

Reporting by Saeed Azhar, Nubur Anand and Tatiana Bacher in New York; Editing by Stephen Coates and Kirsten Donovan

Our Standards: Thomson Reuters Trust Principles.

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