First Republic Bank Seized [UPSC Current Affairs]

In May 2023, regulators took over the California-headquartered First Republic Bank and sold a substantial chunk of its assets to JPMorgan Chase. In this article, we discuss this big development in the world of finance and its implications for the world economy. This topic is relevant for the IAS exam economy segment.

First Republic Bank Collapse Background

• Before the US market could fully recover from the failure of Silicon Valley Bank and the Signature Bank issue, the stock of another significant bank in the US, First Republic Bank, lost value.
• The stock price of the California-based lender fell by more than 90% in 2023 after clients withdrew $100 billion in deposits after the chaos caused by Silicon Valley Bank’s failure. 
• After rescue efforts failed, regulators took over the First Republic Bank, which was later acquired by JPMorgan Chase & Co.

Image source: Indian Express

Reasons for First Republic Bank Collapse

First Republic is the third large U.S. bank to fail in the last two months (March-April 2023), following Silicon Valley Bank and Signature Bank. Here are some of the reasons for its decline, as well as what the JPMorgan deal is likely to mean:

• First Republic’s growth: First Republic Bank began by focusing on large loans at low-interest rates. First Republic’s business model was to attract high-net-worth consumers by offering advantageous mortgage and loan rates. According to bank documents, First Republic also catered to other members of the community, with schools and non-profits accounting for 22% of its company loans.
• Uninsured deposits: First Republic stated that its yearly compounded shareholder returns were 19.5%, which was more than double that of its peers. However, because US deposit insurance only guarantees $250,000 per savings account, its strategy made it more vulnerable than regional lenders with less-affluent customers.  
• Issues with Capital Raise: Meanwhile, its loan book and investment portfolio became less valuable as the Federal Reserve Bank of the United States raised interest rates, limiting its ability to raise capital.

Impact of First Republic Bank Collapse

• When a country’s central bank raises interest rates, banks often pass on the additional cost to their consumers. This increases the cost of applying for new loans as well as the expense of repaying existing loans for clients. 
• When interest rates rose, the bank saw a slowdown in demand for new loans, lowering the value of its total assets and limiting future fundraising opportunities. 
• Loans are regarded as assets for a bank since the bank gets money through loan interest, whereas deposits are considered liabilities because the bank must pay interest on such deposits. 
• Since the Silicon Valley Bank crisis, many investors and large depositors have begun withdrawing their funds from banks. 
• As a result, anyone with deposits above the specified level withdrew all of their deposits in order to protect their financial interests. 

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