The Difference Between First Republic and SVB's Collapse

Just weeks after the collapse of Silicon Valley Bank (SVB), First Republic, another mid-tier, California-based bank, was seized by regulators and sold to America's biggest lender on Monday.

Despite the latter failure being in part attributed to the former, there are striking differences in the way that the two crises were handled. The sale of First Republic without the bank being shuttered suggests federal regulators were on their toes following SVB's failure and were able to prevent wider economic fallout without greater intervention in the sector.

SVB's collapse had posed a threat to the United States economy at a time when inflation remains high and growth has weakened in the wake of the coronavirus pandemic. While intervention had stemmed the immediate ripple effects across other banks, those with similar models to SVB faced questions over their future.

The failure of SVB—the second-largest in U.S. history—led to a federal intervention to guarantee the funds of depositors with the bank, as it did with Signature Bank when it failed 48 hours later. On March 13, SVB's U.K. arm was sold to HSBC for a nominal £1 ($1.25), and U.S. regulators later facilitated the bank's sale to First Citizens.

The intervention over the failure of SVB cost the Federal Deposit Insurance Corporation (FDIC) an estimated $20 billion, with it having to transfer the bank's assets and customers into a government-run bridge bank while a buyer was sought. The independent agency draws its funding from a levy on member banks, rather than the taxpayer.

Regulators had closed SVB after a run on the bank, with depositors rushing to withdraw their funds en masse after an announcement that the institution had sold securities at a loss to plug a hole in its finances. After interest rates had been drastically raised by the Federal Reserve to combat inflation, bond prices fell, which SVB had invested in when rates were close to zero during the pandemic.

The FDIC's decision to close the bank on the brink of collapse in the middle of a Friday meant it had to establish a bridge bank before it could be sold to a private institution. Its sale to First Citizens, including a loss-share agreement, was announced on March 26.

Analysts had warned that without government intervention, the collapse of SVB would have precipitated the closure of potentially thousands of businesses. SVB had primarily served technology companies and start-ups, with many big brands with billions tied up in deposits.

Concerns over what would happen to deposits over $250,000 sparked runs on other banks. To avert a wider risk to the economy, the Biden administration pledged to cover deposits above the federally insured limit.

While administration officials were confident the withdrawals from other banks had largely been quelled, according to the Financial Times, First Republic remained teetering on the edge.

Its imminent failure was partly due to the same reasons SVB had collapsed: federal interest rate rises had seen the value of First Republic's assets drop and, following SVB's failure, wealthy depositors with funds over the federally insured limit began pulling their money. Some $100 billion had been withdrawn since mid-March and the bank's share price had dropped more than 96 percent between March 8 and April 28.

Instead of closing the bank and establishing a federally backed bridge bank, which would have required further FDIC funds, regulators were more proactive this time, swiftly taking the bank into receivership and brokering a sale to JP Morgan over the weekend.

The transaction will still cost the FDIC an estimated $13 billion but avoids depositors—including other large banks with funds in First Republic—from losing out, as well as preventing JP Morgan from having to recognize billions of dollars in losses from the sale.

JPMorgan will pay the regulator a reported $10.6 billion for $229.1 billion in assets and $103.9 billion in deposits. The deal will also include a loss-share transaction. This, the FDIC said, would "maximize recoveries on the assets by keeping them in the private sector" and "minimize disruptions for loan customers."

JPMorgan was able to buy out First Republic despite already holding more than 10 percent of insured deposits in the U.S., which usually prohibits regulators from approving takeovers that would increase those holdings. While the FDIC was obliged to sell the bank to the party with the best offer, analysts have warned of opposition over concerns that a too-big-to-fail bank would now be even bigger, concentrating risk.

"Our government invited us and others to step up, and we did," Jamie Dimon, JPMorgan's CEO, said in a statement on Monday.

Update 05/02/23, 7:24 a.m. ET: This article was updated to include additional information.