(CN) — California regulators took control of San Francisco-based First Republic Bank and turned it over to the feds Monday morning, the third midsize bank to fail in less than two months and the second-largest bank failure in U.S. history.
The California Department of Financial Protection and Innovation said First Republic was seized based on California Financial Code section 592, specifically a subdivision of the law that deals with banks that are “conducting its business in an unsafe or unsound manner.”
Experts pointed to the bank’s underwriting of low interest mortgages when interest rates were low, which lost value as the Federal Reserve hiked interest rates, and a withdrawal of deposits from the bank as reasons for the bank's implosion.
State regulators gave receivership of the company to the Federal Deposit Insurance Corporation, whicvh accepted a bid from JPMorgan Chase Bank to assume all deposits and assets of the bank.
“In close partnership and coordination with the FDIC, California DFPI took decisive and critical action to stabilize the situation, avert layoffs, and protect Californians. The swift action by FDIC to secure a purchaser for the bank will protect depositors, including uninsured depositors," California Governor Gavin Newsom said in a statement.
In a statement, the FDIC said deposits with First Republic remain insured and customers should continue banking with their preferred branch until the switch to JPMorgan Chase is complete.
With assets totaling around $229.1 billion and total deposits around $103.9 billion, First Republic is the second largest U.S. bank to collapse after Washington Mutual fell during the 2008 financial crisis and recession. JPMorgan Chase also scooped up Washington Mutual after the latter was seized by regulators.
“Our government invited us and others to step up, and we did,” wrote Jamie Dimon, chairman and CEO of JPMorgan Chase, in a statement on the company’s website.
“First Republic branches will open on Monday, May 1, as normal, and clients will continue to receive uninterrupted service, including digital and mobile banking capabilities,” the statement continues.
A similar statement from the company appeared on First Republic's website promising customers that “all preferred banking offices will operate as usual,” and that First Republic customers will eventually have access to JPMorgan Chase’s branch network.
“You and your assets are now backed by the fortress balance sheet of JPMorgan Chase, and all of your deposits are protected,” the statement continued.
JPMorgan Chase’s acquisition of First Republic makes the nation's largest bank even bigger.
First Republic's fall marks the third large bank in the country to fail after Signature Bank and Silicon Valley Bank fell in March.
“Why didn’t they see what was going on at First Republic earlier?,” Gerard Caprio, an emeritus professor of economics at Williams College said, pointing to the failure of SVB and Signature Bank, and the failure of regulators to see where they were heading.
Caprio questioned whether regulators missed systemic problems in the bank's business practices, or saw them and failed to act.
In a report issued on Friday, the Board of Governors of the Federal Reserve acknowledged being partially responsible for the collapse of SVB and for taking a lax approach to regulating banks. The Fed promised a more vigorous response to oversight practices and regulations in the future.
Caprio said there’s not enough information now to understand how First Republic’s fall will affect small to medium-sized banks, but he doesn’t think its demise will harm the banking system. Instead, he said he hopes the fall of First Republic will lead to more oversight of banks, and for the markets to realize the risk of buying equity in banks.
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