What Happened with First Republic Bank?

First Republic found itself amongst the regional banks that faced failure in the early part of 2023.

On May 1, 2023, First Republic Bank (FRB) faced a significant downturn, marking it as the second-largest bank failure in the annals of U.S. banking history. JPMorgan Chase subsequently acquired a majority of its business operations following federal regulators’ intervention. 

The downfall of FRB was precipitated by a sudden withdrawal of deposits, a crisis that occurred shortly after the collapse of two other substantial regional entities, Silicon Valley Bank and Signature Bank. It’s noteworthy that all of these institutions had significant volumes of uninsured deposits.

What Was First Republic Bank?

First Republic Bank, a San Francisco-based regional institution catering to high-net-worth clients, ended its operations in 2023 and was subsequently taken over by JPMorgan Chase. One of the contributing factors to its failure was the fact that a substantial portion of its deposits exceeded the coverage limit set by the Federal Deposit Insurance Corp. (FDIC).

The FDIC provides coverage of up to $250,000 per depositor, for each account type. This means in the event of a bank’s failure, the depositors’ funds are safeguarded up to the stated amount. However, any balance exceeding this threshold typically falls outside the purview of coverage.

Data analysis by S&P Global Market Intelligence revealed that by December 2022, a staggering 67.4% of First Republic’s deposits were uninsured. The collapse of Silicon Valley Bank and Signature Bank fueled apprehension among First Republic’s customers who had uninsured funds, prompting them to withdraw their money from the regional bank. This led to a sudden rush of withdrawals.

Just prior to its failure, First Republic held $103.9 billion in deposits and boasted assets worth $229.1 billion. JPMorgan Chase took over the lion’s share of these assets and subsequently rebranded 84 branches across eight states, which were reopened on May 1, 2023. Consequently, First Republic’s customers experienced no interruption in service, and their funds, including uninsured deposits, remained secure.

The downfall of First Republic was the third incident of bank failure in 2023, following Silicon Valley Bank and Signature Bank, as reported in the Federal Reserve’s list of failed banks. Collectively, these three banks held assets amounting to $548.5 billion, a figure that surpasses the total assets of all banks that failed in 2008, during the peak of the financial crisis.

Every customer of First Republic Bank had a dedicated “First Republic Relationship Manager”. 

This professional served as the go-to contact, providing a personalized touch to customer service. The bank’s primary services centered on private banking, private wealth management, and private business banking.

In the realm of private banking and wealth management, customers were offered a suite of services. These encompassed mortgage and personal lending options, as well as accounts for checking, savings, and Certificates of Deposit (CDs). 

Private wealth management extended further to include investment management, financial planning, foreign exchange services, trust administration and custody, along with brokerage and insurance services.

Private business banking offered tailor-made banking and lending services, with a particular focus on specific sectors. These included venture capital, private equity funds, hedge funds and firms, and investment management firms. 

The bank also catered to other targeted industries such as property management and real estate investors, private clubs, independent schools, medical practices, and wineries.

A Brief History of First Republic Bank

Established in 1985 by James H. Herbert II, First Republic Bank initially concentrated on offering jumbo mortgages, Certificates of Deposit (CDs), and savings accounts. The bank, based in San Francisco, had a particular focus on providing loans for luxury homes, second homes, condos, co-ops, and investment properties.

As the 1990s drew to a close, First Republic evolved into a full-service bank, expanding its portfolio of services and establishing its presence in markets along the East and West Coasts. Over the subsequent years, the bank cultivated a reputation for providing bespoke service to a smaller customer base, with a continued emphasis on high-net-worth clients.

In a series of mergers and acquisitions, First Republic amalgamated with Merrill Lynch in 2007, which was itself acquired by Bank of America in 2008. Undeterred by these developments, Herbert, in 2010, gathered private equity capital and obtained regulatory approval to repurchase First Republic.

Why Did First Republic Bank Fail?

First Republic Bank succumbed to failure due to a confluence of factors, many of which were similar to the issues that precipitated the downfall of Silicon Valley Bank and Signature Bank. These included a sizable amount of uninsured deposits and liquidity challenges, further amplified by prevailing investor anxiety regarding regional banks.

Uninsured deposits: The potential for a bank run increases when there is a significant volume of uninsured deposits, especially during times of investor panic. Given the high-net-worth profile of First Republic’s clientele, the bank had a substantial proportion of uninsured deposits, exceeding 67% of total deposits as of December 2022.

Liquidity crunch: The primary source of income for First Republic was the net interest income generated from loans and investment securities. A significant portion of the bank’s investments was locked in real estate loans and municipal securities, which were not as liquid and did not yield competitive interest rates. As of December 2022, among mid-sized banks, First Republic had the highest ratio of loans and securities to uninsured deposits.

Credit rating downgrades: Repeated downgrades of its credit rating by agencies further plagued First Republic Bank. These downgrades were driven by concerns that capital infusions wouldn’t effectively resolve the bank’s ongoing struggles with liquidity, funding, and profitability.

General mistrust in regional banks: The collapses of Silicon Valley Bank and Signature Bank earlier in the year, coupled with credit rating downgrades, bred increased anxiety among investors about retaining uninsured deposits with a regional bank.

As its deposits began to dwindle rapidly after the failure of Silicon Valley Bank and Signature Bank, First Republic resorted to borrowing from the Federal Home Loan Bank Board (FHLB) and the Federal Reserve. It also accepted a $30 billion cash infusion from a consortium of 11 banks. Concurrently, its share price took a nosedive, plummeting from $122.50 on March 1, 2023, to just $3.51 on April 28.

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First Republic Bank Stock Impact

The trajectory of First Republic Bank’s stock took a dramatic turn in 2023. Historically, the bank’s shares had been a solid investment, with the stock price reaching an all-time high of $219.91 on November 16, 2021​1​. The average stock price for the year 2022 was $149.0652, although it ended the year at $121.6515, marking a 40.55% decrease from the opening price​​.

However, the landscape drastically changed in 2023, which culminated in the bank’s failure and subsequent acquisition by JPMorgan Chase. As of May 1, 2023, the closing stock price for First Republic Bank had plummeted to a mere $3.51​3​. 

This marked a severe decline from the 52-week high of $171.09 and even below the 52-week low of $2.98​4​. The sudden collapse of the bank resulted in significant losses for shareholders, dramatically highlighting the potential risks involved in stock market investment.

Effects on Depositors and Investors

Despite the turbulence, First Republic customers experienced uninterrupted service and their funds remained secure, courtesy of the acquisition by JPMorgan Chase.

As per the plans set out on May 5, 2023, First Republic’s systems and operations were slated to gradually transition to JPMorgan Chase’s technology. It was anticipated that several existing First Republic branches would be transformed into J.P. Morgan wealth centers. Additionally, the bank’s private wealth management platform was on track to be integrated with J.P. Morgan Advisors.

Who Funded First Republic Bank’s Salvage Operation?

The Federal Deposit Insurance Corporation (FDIC) and JPMorgan Chase were the financiers behind the rescue of First Republic Bank. JPMorgan handed over $10.6 billion to the FDIC for First Republic’s acquisition. It was anticipated that the FDIC would offer $50 billion in fixed-rate financing for restructuring the balance sheet, along with partial loss coverage for mortgages and commercial loans. The FDIC’s contribution originated from the Deposit Insurance Fund (DIF), a fund sustained by quarterly fees paid by banks to the FDIC for risk evaluation.

Is My Investment Secure at a Regional Bank?

Customers who had their investments at First Republic Bank discovered that their funds were secure even after the bank’s collapse, thanks to JPMorgan Chase taking over its assets. Generally, your funds are considered safe in an FDIC-insured bank account up to the $250,000 limit. However, anything beyond that limit might not be recoverable in the event of a bank failure.

What Does “Too Big to Fail” Imply?

The term “too big to fail” refers to a financial institution of such magnitude that its failure poses a threat to the wider economy. If an institution is classified as “too big to fail”, the U.S. government may take necessary measures to save it and avert broader economic losses. As of April 2022, eight banks, including JPMorgan Chase, were deemed “globally systemically important” and thus, were held to elevated standards.

The Takeaway

First Republic Bank was among several regional banks that collapsed in early 2023, primarily due to bank runs spurred by the large volume of uninsured deposits they held and financial challenges stemming from the wider interest rate environment.

To safeguard your investments, consider maintaining a balance below the FDIC’s insurance cap of $250,000 in your bank account. If you need to deposit more than that amount, consider opening another account at a different bank. A financial advisor can offer more personalized guidance on how best to distribute your funds according to your unique financial situation.

Learn more about Bank Failures and How Regional Banks are Turning a Crisis into an Opportunity