Another Bay Area Bank Collapsed. Here's How Big Deposits From the Very Wealthy Contributed

After California regulators seized San Francisco’s troubled First Republic Bank early Monday, the Federal Deposit Insurance Corporation (FDIC) promptly sold all of its deposits and most of its assets to JPMorgan Chase in a bid to end the turmoil that has raised questions about the health of the U.S. banking system.

The bank’s demise marked the second-largest bank failure in U.S. history. It was also the second Bay Area-based bank to fail in less than two months, joining Silicon Valley Bank — for just over seven weeks the second-largest bank failure, and now the third — which was seized by the FDIC on March 10 after its collapse following a bank run.

In the wake of Silicon Valley Bank’s failure, concerned depositors also began pulling money out of First Republic, which has more than three dozen branches in the Bay Area.

That’s an especially significant problem for banks based in a region where the tech industry has created enormous wealth for some. For both failed banks, big money meant big deposits that often exceeded federal insurance maximums.

“Other banks across the nation, they don’t have these very large uninsured depositors that all of a sudden may be more prone to make a run on the bank,” said Cal State East Bay economics professor Filippo Rebessi. “Because if the bank goes bankrupt, they don’t have their money insured.”

Rebessi said it’s hard to tell whether there will be more large-scale bank failures in the near future.

“A month ago, I would have told you the worst is behind us, because I really thought that the action that had been taken was decisive,” he said. “At the same time, it seems like we’re going through some very unpredictable times and depositors are not feeling completely safe in their circumstances.”

Despite a $30 billion infusion of capital by major U.S. banks and other efforts by federal regulators to restore confidence in First Republic, it’s now the third midsize bank, with Signature Bank, to fail in less than two months. The only larger bank failure in U.S. history was Washington Mutual, which collapsed at the height of the 2008 financial crisis and was also taken over by JPMorgan in a similar government-orchestrated deal.

“Our government invited us and others to step up, and we did,” said Jamie Dimon, chair and CEO of JPMorgan Chase.

First Republic’s 84 branches opened on Monday as branches of JPMorgan Chase, which acquired the bank’s $92 billion in deposits and $203 billion in loans and other securities. The bank’s shareholders are likely to be wiped out as part of the deal.

Dimon said in a conference call with both reporters and investors that he believed “this part of this (banking) crisis is over.” Other midsize banks reported their results last week and the vast majority showed that deposits had stabilized and profits remained relatively healthy. The outlier was First Republic.

When catering to the very rich becomes a liability

Before this year, First Republic was the envy of the banking industry. Its well-appointed branches served warm cookies to its clients — who were almost exclusively the rich and powerful. Its bankers lured in wealthy clients with low-cost mortgages and attractive savings rates in order to sell them on higher-profit businesses like wealth management and brokerage accounts. In return, the wealthy rarely defaulted on their loans and parked substantial sums of money in the bank that could be lent elsewhere.

But that business model of catering to the rich became a liability with the collapses of Silicon Valley Bank and Signature Bank. These banks had large amount of uninsured deposits — that is, deposits above the $250,000 limit set by the FDIC. As was the case with Silicon Valley Bank and Signature Bank, First Republic clients with large accounts were quick to pull their money at the first sign of trouble.

“Too many (First Republic) customers showed their true loyalties were to their own fears,” wrote Timothy Coffey, analyst with Janney Montgomery Scott, in a note to investors.

A coalition of a dozen banks pulled together a $30 billion funding package for First Republic last month that, for a while, seemed to stanch the bleeding of deposits. But it became increasingly clear that First Republic was on borrowed time: It needed to find a buyer, or find new forms of funding to replace the deposits that had left the bank.

First Republic planned to sell off unprofitable assets, including low-interest mortgages that it provided to wealthy clients. It also announced plans to lay off up to a quarter of its workforce, which totaled about 7,200 employees in late 2022. But it was seen as too little, too late, by analysts. The bank seemed to be on the brink of failure for weeks.

The $30 billion package “bought time when time was needed” for First Republic, said Jeremy Barnum, JPMorgan’s chief financial officer, in a call with reporters.

Last Monday, First Republic reported its first-quarter results and stunned analysts and investors when it revealed that $100 billion in deposits had flowed out of the bank, most in mid-March immediately after the failure of Silicon Valley Bank and Signature Bank. Its executives took no questions from analysts on an earning conference call. First Republic’s stock plunged more than 50% the day after the report.

By the middle of last week, it became clear government intervention in First Republic was necessary. Treasury officials asked banks to submit bids for First Republic, and bankers and regulators worked through the weekend to find a way forward.

Once again JPMorgan Chase, the nation’s biggest bank with a reputation as a dealmaker during times of crisis, became the government’s go-to bank; Treasury officials had enlisted JPMorgan last month to lead the $30 billion rescue package. Also, back in 2008, Dimon was the go-to banker for Washington to find private solutions for that banking crisis, and JPMorgan acquired both Bear Stearns and Washington Mutual.

The Federal Reserve and FDIC, which regulate the banking industry along with the Office of the Comptroller of the Currency, could face renewed criticism over their handling of First Republic. Both acknowledged Friday in separate reports that lax supervision had contributed to the failures of Silicon Valley Bank and Signature Bank.

“These banks were allowed to get too big too quickly when interest rates were low,” Coffey said in an interview.

There could also now be questions about the size of JPMorgan Chase, which has more than $3 trillion in assets and is by far the biggest of the “too big to fail” institutions around the world.

Regulators “permitted the country’s biggest bank to get even bigger. We expect this will be a Democratic focus for months,” said Jaret Seiberg, banking analyst at TD Cowen.

JPMorgan is so big that by law it would not be allowed to buy First Republic because no one bank can have more than a 10% market share of deposits in the U.S. It is only because First Republic failed that JPMorgan was allowed to step in.

In a statement, JPMorgan portrayed the First Republic deal as beneficial both to the financial system and the company. As part of the agreement, the FDIC will share losses with JPMorgan on First Republic’s loans. The FDIC expects First Republic’s failure to cost the insurance fund roughly $13 billion, which is funded by bank assessments, not by taxpayers.

JPMorgan expects the addition of First Republic to add $500 million to its net income per year, although it expects to incur $2 billion in costs integrating First Republic into its operations over the next 18 months.

This story includes reporting by Ken Sweet, Matt O’Brien and Christopher Rugaber of The Associated Press, and KQED’s Erin Baldassari and Spencer Whitney.