On Monday, JPMorgan Chase—the largest bank in the United States—grew even larger as it took over First Republic Bank after government regulators seized the troubled lender. This marks the end of the second-largest bank failure in U.S. history and the fourth regional bank closure in the country since March. In this deal, JPMorgan is taking on $173 billion in loans, $30 billion in securities, and $92 billion in deposits from First Republic.
The acquisition was coordinated with the Federal Deposit Insurance Corporation (FDIC) to secure a single buyer and minimize the impact on the government-backed insurance fund.
While this deal means even more consolidation in the U.S. banking industry—a trend Democratic leaders have long criticized—having one buyer created a much simpler outcome, helping to prevent further fallout that could have happened if First Republic had been split among several parties, sources told Bloomberg.
Along with acquiring First Republic’s loans and securities, JPMorgan announced in a statement Monday that the FDIC agreed to share in both the losses and any recoveries on First Republic’s single-family and commercial loans.
What set First Republic Bank apart?
Concerns about First Republic Bank’s future started as early as the collapse of Silicon Valley Bank (SVB) in March, quickly followed by Signature Bank’s closure. Like First Republic, both SVB and Signature targeted “elite” clients with very large cash balances—specifically, an unusually high number of accounts above the FDIC’s $250,000 insurance limit.
The lack of FDIC protection was already a red flag for First Republic, SVB, and Signature. But that was just the beginning.
First Republic was slightly bigger than SVB and Signature, but it also had a unique approach to serving its high-net-worth clients. The bank aimed to be a one-stop shop for these customers, offering everything from business loans to personal wealth management.
This meant that a small group of high-value clients made up most of First Republic’s deposits, leaving the bank especially exposed if those clients decided to withdraw their money.
When alarm bells rang in March after SVB’s collapse, First Republic’s clients were quick to react, with many moving their funds elsewhere to avoid having their assets frozen (just like many SVB customers experienced right after their bank failed).
Lack of “sticky” accounts put First Republic at risk
Some called First National a “boutique” bank, but it was actually a bit larger than SVB before both banks saw their stock prices crash and ultimately closed. By focusing on an elite clientele (with nearly two-thirds of accounts above FDIC insurance limits), First Republic lacked what bankers call “sticky accounts”—the kind of stable deposits that help a bank weather a run on funds.
So it wasn’t a shock when First Republic revealed on its May 1 earnings call that it had lost over $100 billion in assets—or 40% of its total deposits—in just three months as top clients pulled their money out.
What’s more, while First Republic had fewer uninsured accounts than SVB—about 60% compared to SVB’s 94%—it had a sky-high loan-to-deposit ratio of 111% at the end of 2022. In other words, the bank was lending out more money than it actually had on hand.
Bonds and interest rates fueled the runoff
Another major factor in these recent bank failures was the drop in value of U.S. government bonds, which both First Republic and SVB were taking heavy losses on before they closed.
Bond values naturally rise and fall with interest rates, but a dip in a bank’s bond portfolio isn’t usually a problem—unless the bank is forced to sell those bonds to cover losses elsewhere, whether from bad investments or a sudden drop in deposits.
Falling bond values combined with a lack of “sticky” accounts created a perfect storm for First Republic—but there are lessons here for borrowers who want to avoid getting caught in a high-profile banking crisis.
The top tip? Diversify your sources of capital so that if one lender stumbles, your business isn’t left stranded—you don’t want all your eggs in one basket.
To help you manage an unexpected cash crunch, we’ve put together a practical checklist of steps founders can take right now to make sure your runway isn’t cut short by turbulent markets.
Read more about our Strategies for Managing a Liquidity Crisis on our blog, or contact the Boast AI team today to learn how non-dilutive funding can power your R&D.
