Before this year, First Republic enjoyed a favourable position in the banking industry, catering mostly to very wealthy clients. They even used to serve warm cookies to their clients as the entered the bank.
They seemed to be very stable and its business model of offering low cost mortgages and attractive savings rates to rich people (while encouraging them to invest in wealth management and brokerage accounts) was considered very successful.
The trouble really only revealed itself with the recent collapses of Silicon Valley Bank and Signature Bank where clients with large accounts quickly withdrew their funds.
This just highlighted how investors and clients react these days revealing their lack of loyalty during times of trouble.
Many consumer realised that their really big deposits with banks (such as First Republic) are more than would be covered by government insurance policies and so could be lost if things go wrong (which they have been recently).
‘nearly 70% of First Republic’s deposits were uninsured’
Apparently, nearly 70% of First Republic’s deposits were uninsured, (according to S&P Global Market Intelligence data analysis).
In an effort to hedge their bets and avoid liquidity issues from client withdrawals First Republic attempted to be smart and sell unprofitable assets and to lay off a decent chunk of their staff.
‘Investors and clients began to be concerned and withdrawals from the bank began to gather speed’
Investors and clients began to be concerned and withdrawals from the bank began to gather speed. This concerned investors who began to sell shares driving the values down.
The bank continued to take steps to show that they were able to handle the pressure but despite a $30 billion funding package from a coalition of banks, the bank continued to lose deposits and share value, eventually reaching a critical point.
‘That’s when US Treasury officials intervened’
That’s when US Treasury officials intervened, and began looking for bids from other banks to rescue First Republic. JPMorgan Chase, known for its wheeler dealer skills during crises, was asked if they were interested and …they were.
In the past, JPMorgan successfully reduced the impact of the 2008 banking crisis by acquiring Bear Stearns and Washington Mutual. They hoped to now do the same with First Republic and restore market confidence.