Earlier this morning, JPMorgan took over embattled First Republic Bank (ticker FRC) following an auction process initiated by regulators over the weekend. Despite previous attempts to stabilize the bank, First Republic remained in focus as the next weakest link in the U.S. banking system following three regional bank failures in March. While risks remain, we continue to believe that contagion throughout the broader banking system, via the largest U.S. banks is unlikely.

What happened?

In early March, the investment community was caught off guard when three banks catering to the crypto and venture capital industries failed in rapid succession:

  • March 8th, Silvergate Capital Corp (ticker SI), a bank that at one point had $14bn in deposits, commenced a voluntary liquidation,
  • March 10th, Silicon Valley Bank (ticker SIVB), the 10th largest bank in terms of assets, holding $175bn in deposits, went into FDIC receivership,
  • March 12th, Signature Bank (ticker SBNY), with $83bn in deposits, went into FDIC receivership.

Attention quickly shifted to First Republic Bank, a California-based specialty lender with approximately $175B in deposits, as the potential next shoe to drop. First Republic catered to wealthy individuals offering low-rate mortgages in exchange for maintaining large deposit balances at the bank. Deposits in excess of $250,000 are not insured by the FDIC and in the wake of the other regional bank failures, clients began to withdraw deposits fearing significant losses in the event of a bank run. At the time, JPMorgan and other large banks deposited $30B with First Republic to help stabilize the institution while regulators took actions to ensure adequate liquidity within the banking system.

On April 24, First Republic reported earnings and revealed that depositors withdrew more than $100bn in deposits in the latest quarter. The news reignited fears of collapse and prompted additional withdrawals. Over the weekend, U.S. regulators, led by the FDIC, initiated an auction process for First Republic with plans to seize the bank and immediately cede control to the winning bidder.  That process was finalized this morning with the purchase by JPMorgan. According to the FDIC, First Republic’s 84 offices will reopen this morning as branches of JPMorgan Chase and all depositors will have full access to their deposits.

What happens next?

On Wednesday, the Federal Reserve is expected to announce another (possibly final) quarter point rate hike bringing the Fed funds range to 5.00%-5.25%. Market participants are pricing for rate cuts in late 2023 and early 2024, though policymakers have yet to concede that narrative. With expectations for relatively slow growth, a gradual rebalancing of supply and demand in the labor market and inflation moderating, committee members don’t foresee rate cuts this year. Even so, a 5.00% terminal rate is lower than the peak expectation of 5.50%-5.75% just prior to regional bank failures in March which served as an additional tightening mechanism.

While risks remain within the banking sector, we continue to believe that contagion throughout the broader banking system, in particular via the largest U.S. banks, is unlikely. If not for steps taken by regulators and larger peers, First Republic might have failed alongside Silicon Valley and Signature Banks back in March. In our view, First Republic’s demise is an extension of the original circumstances as opposed to an indication that risks to the U.S. banking system are worsening.

It should also be noted that depositors did not lose money despite these bank failures. The resolution of each of the four failed banks restored access for customers to their deposit balances, even balances above the $250,000 FDIC insurance limit, despite the banks going into receivership.

We will continue to monitor developments and communicate our views. In the meantime, please contact any member of our team if you have questions.

Reminder on safety of cash balances at Greenleaf Trust

As a reminder, Greenleaf Trust utilizes a money market mutual fund for cash balances on behalf of most clients. This fund is not a deposit of any bank. This fund operates as a “government money market fund” and invests primarily in Treasury Obligations and repurchase agreements collateralized solely by Treasury Obligations and seeks to maintain a stable $1.00 net asset value. Greenleaf Trust is a state chartered bank exercising only our trust powers, foregoing the ability to engage in deposit or lending activities.