The collapse of First Republic Bank is an anomaly. It is a mystery how a bank flush with cash ($212.6 billion in assets in 2022) could collapse almost overnight. Here was a commercial bank and provider of wealth management services headquartered in San Francisco, catering to high-net-worth individuals with 93 offices in 11 states, primarily in New York, California, Massachusetts, and Florida. Founded in July 1985, the bank’s revenue in 2022 was $6.75 billion.
Suddenly panic! In a very short period of time, depositors withdrew more than $100 billion, spooking the FDIC! The Feds moved in and sold it to JPMorgan Chase in exchange for taking over $173 billion of loans, $30 billion of securities, and $92 billion of deposits. If you had insured or uninsured money in First Republic accounts, your funds are now safe and managed by JPMorgan Chase.
This is not the first time that panic has been used to describe the collapse of banks. Over a century ago, “the Bank Panic of 1907” was a short-lived banking and financial crisis in the U.S. Without a central bank to fall back on, leading financiers (most notably J.P. Morgan) stepped in and put their own money on the line to bail out the surviving Wall Street banks and other financial institutions. This event gave impetus to plans to impose more government oversight and public responsibility to bail out financial markets, leading to the creation of the Federal Reserve System a few years later. The Fed had three main purposes: to serve as a lender of last resort, to serve as a fiscal agent for the U.S. government, and to act as a clearinghouse.
In the current panic crisis, First Republic, which became the second-largest bank to fail in U.S. history, lost $100 billion in deposits in March. A group of America’s biggest banks came to its rescue with a $30 billion deposit. Those deposits are supposed to be repaid, JPMorgan said.
In the meantime, while First Republic was losing depositors, many of the bank’s clients moved their money to JPMorgan believing that it was a much safer bank. In fact, it got about $50 billion in new deposits from panicky customers looking to move their money to a too-big-to-fail bank. JPMorgan CEO Jamie Dimon played a pivotal role in earlier efforts to rescue First Republic Bank by raising money from his own bank and others. The big banks feared that a collapse of First Republic would further erode confidence in the US banking system which would only come back to bite them.
Chase was not the only bank bidding for First Republic. Regional banks like PNC Financial Services Group, Citizens Financial Group, and Fifth Third Bancorp also submitted bids to the FDIC. But the FDIC decided that JPMorgan would be the best suitor.
“This is the last stages of that initial panic. First Republic’s problems started as a result of SVB and Signature,” said Steven Kelly, a senior researcher at the Yale Program on Financial Stability. “This isn’t the story of 2008, where one bank went down and investors focused on the next biggest bank, which would wobble.”
The question still remains why. Why was there panic in the first place and why did people rush to withdraw their money from the First Republic? Several banking experts I spoke to felt that this was a mad rush by the richest.
They explained the banking fiasco this way. The perception was that banks like Silicon Valley and Signature have a very wealthy clientele. When those banks failed, there was a great deal of uncertainty as to what degree the Federal insurance would kick in. It was particularly worrisome for the wealthy clients who knew that the standard deposit insurance coverage limit is $250,000 per depositor, per FDIC-insured bank, per ownership category. Deposits held in different ownership categories are separately insured, up to at least $250,000, even if held at the same bank.
For the California bigwigs who banked at either Silicon Valley or First Republic the safety of their rather large bank accounts became a major issue. When both Silicon Valley and Signature collapsed it set off alarm bells in many multi-million-dollar homes in California that their money may no longer be safe. They began to withdraw money from the First Republic in favor of larger, more secure banks. When this became a movement they not only took their money out of the First Republic but in a sense took the bank with them. Ironically, it turned out that both those who withdrew and those who stayed put ended up with the same institution JPMorgan.
The experts now believe that the First Republic seizure was the last of the crumbling banks with the public learning some valuable lessons. The FDIC insurance of $250,000 is an absolute despite some rumblings of late of a possible increase. Financial experts advise that to safeguard deposits that are greater than $250,000 depositors should open accounts at multiple banks, with FDIC insurance, of course.
In the recent bank failings, the FDIC managed to find institutions who took over deposits thus making sure that the customer continues to receive the services and the protection. But that does not mean that it will be an automatic in the future if a bank fails. The experts still counsel us to be prudent and make sure that our hard-earned money is protected. Banking customers of the failed banks told many stories of the sleepless nights they had until they learned that their money was safe. Greg Richardson told an interviewer: “I can’t describe the angst that both my wife and I had when we heard that First Republic was shaky.”
For most people keeping money in an FDIC insured bank is still the best option especially with the current slowly creeping up interest rates. But at the same time, it is important to know the insurance limitations and not to rely on a magical bailout which may not materialize. One bank executive summed it up this way: “It’s never good to see banks go down but the three failed banks taught many Americans how to bank safely. We need a smoke alarm to smell trouble but even better is to take initial steps to protect ourselves.” Well said!