Chase's takeover of First Republic does not end worries over US banks - experts

US President Joe Biden on Monday hailed moves by US regulators to facilitate the sale of First Republic Bank, protect all its depositors and ensure that US taxpayers are not affected.

"These actions are going to make sure that the banking system is safe and sound," Biden told an event at the White House. "Critically, taxpayers are not the ones that are on the hook."

He repeated his call for stronger regulation and supervision of large and regional banks.

Shares of several regional lenders fell on Monday after the collapse of First Republic Bank, the third major casualty of the biggest crisis to hit the US banking sector since 2008.

The crisis unravelled after the closure of Silicon Valley Bank and Signature Bank in March led to deposit outflows from smaller lenders and fueled fears of similar liquidity crunches at peers.

A deal was announced earlier on Monday that allows for an orderly failure of First Republic. Under the terms, JPMorgan Chase & Co will pay $10.6 billion to the US Federal Deposit Insurance Corp (FDIC), which took FRC into receivership, for most of the failed bank's assets.

White House: First Republic was 'severely mismanaged'

Decisive actions taken by US regulators to seize First Republic Bank and facilitate its takeover by JPMorgan Chase & Co will protect depositors and ensure the banking system stays stable, White House press secretary Karine Jean-Pierre said on Monday.

Jean-Pierre told reporters that the actions taken by US regulators would also ensure that First Republic, which she said was "severely mismanaged," would be held accountable.

"This is not 2008," Jean-Pierre reassured while saying the US government and FDIC will continue to monitor the situation and hold banks accountable.

The KBW Regional Banking Index shed 2.7% on Monday, hitting a session low, while shares of Citizens Financial Group, PNC Financial Services Group, Truist Financial Corp and US Bancorp fell between 3% and 7%. Valley National Bankcorp, which owns Valley National Bank, lost more than 20%.

Shares of JPMorgan Chase rose 2.14%, making the largest US bank the top gainer on the Dow Jones. In the options market, traders were still being cautious on most regional banks, with the 30-day implied volatility on the SPDR S&P Regional Banking ETF - a measure of expected near-term price swings - dropping about 2 points on Monday from the previous week.

"The really positive thing about this is that all of the depositors, whether they were insured or uninsured, were protected for every cent of their deposits," said financial regulation expert and Boston College Law School professor Patricia McCoy, adding "I am concerned in the longer term about certain problems in the banking system."

First Republic was among regional U.S. lenders most battered by a crisis in confidence in the banking sector in March when depositors fled en masse from smaller banks amid the collapse of two other mid-sized US banks hurt by rapid interest rate hikes orchestrated by the Federal Reserve.

First Republic had limped along since then, but investors fled again last week when it disclosed more than $100 billion in outflows in the first quarter.

"It was really the living dead," McCoy said. "And so the question was, how would it be closed down?"

Barely a week later, California regulators seized the First Republic and put it into FDIC receivership alongside the sale of its assets, marking the third major US bank failure in two months and the largest since Washington Mutual in 2008.

JPMorgan agreed to pay $10.6 billion to FDIC as part of the deal to take control of most of the San Francisco-based bank's assets and get access to First Republic's coveted wealthy client base.

The deal will cost FDIC's Deposit Insurance Fund about $13 billion, according to the regulator's initial estimate.

Analysts and industry executives said the deal -- struck after the FDIC ran an auction process that saw several other banks bid -- should calm markets. But they added that it came at a cost: the biggest banks were getting stronger while it was getting harder for smaller banks to do business.

"By winning the bidding auction," said Dennis Kelleher, CEO of Wall Street reform group Better Markets, "Chase not only got for itself a couple of hundred billion dollars more in assets and deposits and other investments and access to a terrific new high-quality customer base. It also prevented a competitor from getting those assets in deposits and customer base. So it turns out to be doubly good for JPMorgan Chase, not so good for the other banks."

Bidders losing out to JPMorgan included PNC Financial Services and Citizens Financial Group, sources familiar with the matter said.

Kelleher said he doesn't expect other mid-sized banks to fail in the near future, but he worries about the impact of the Fed's interest rate hikes on other, less regulated parts of the US financial system. "We have not seen how that stress is going to play out in a lot of other interest rate sensitive areas, for example, private equity, leveraged loans, commercial real estate, as well as numerous other embedded leveraged bets that are peppered throughout the financial system now."

The failed bank's 84 offices in eight states reopened on Monday as branches of JPMorgan Chase.

Reuters