Washington, D.C. (May 2, 2023) – A little more than a month after the high-profile closure of Silicon Valley Bank (SVB) (see Lewis Brisbois' alert from March 14, 2023), California bank regulators closed First Republic Bank on Monday, May 1, 2023, marking the second-largest bank failure in U.S. history and launching a hurried bidding process from several banks over the weekend. In the early morning hours of May 1, the Federal Deposit Insurance Corporation (FDIC) was appointed receiver, and it then transferred all of First Republic's deposits and most of its assets to JPMorgan Chase Bank (Chase).

A Tale of Two Bank Failures

While both First Republic and SVB had similar factors that contributed to their downfall, the process by which they were sold was different. Both banks rapidly increased growth during the last three years, more than doubling in size from $100 billion to over $200 billion. Both banks had uninsured deposits that exceeded the amount of their insured deposits, and both experienced quick, unexpected outflows of deposits in the tens of billions of dollars. Additionally, both banks concentrated their loans in niche markets.

As a result of the panic that ensued after the demise of SVB, in the first week thereafter First Republic lost about $100 billion in deposits. It was saved from immediate failure by a quick deposit infusion of $30 billion by a Chase-led consortium of 11 banks. This cushion gave the FDIC time to process First Republic's assets and liabilities in a more orderly fashion than the process that was used for SVB. The Federal Reserve was the primary federal regulator of SVB, and the FDIC had little knowledge of SVB's condition. As a result, the bid process was delayed because the FDIC was unable to develop a bid package for other banks to quickly submit acceptable bids.

With First Republic, the FDIC was its primary federal regulator and its examiners had intimate knowledge of the bank's condition. This enabled FDIC to timely develop a bid package that produced competitive bids that would produce the least cost to the FDIC.

As was the case with SVB, the FDIC engaged in a purchase and assumption transaction to transfer all the deposits and most of the assets to Chase. However, customers of First Republic still face the same question as customers of SVB did, namely, "what do I do now?"

What Comes Next

Regarding deposits, most of First Republic's deposits exceeded the FDIC $250,000 limit. Should those depositors keep the total amount in Chase or seek to diversify their deposits? And for First Republic insured depositors, what actions are best if they also have insured deposits in Chase and their Chase accounts now exceed the FDIC insurance limit?

All of the First Republic loans were transferred to Chase. FDIC expects to have a $13 billion loss as a result of the First Republic failure, and it also has entered into a Loss Sharing Agreement to cover unexpected losses from the transferred loans. Borrowers of First Republic funds could have the opportunity to renegotiate existing loans or seek financing from other banks under more favorable terms.

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