What Happened

First Republic Bank’s (FRC) weeks-long struggle to survive as an independent bank ended early Monday morning, as the bank was taken into FDIC receivership, with all of its deposits and the “substantial majority” of its assets sold to JPMorgan (JPM). First Republic bank branches will be open for business Monday as normal, under the JPM ownership. As has been widely reported, FRC is the second-largest US bank failure ever (Washington Mutual is the largest—9/2008).

Not Surprised, Though

Ultimately, this was the resolution that we had anticipated. FRC was too large and its assets too valuable for it not to be folded into a large institution. Early trading in JPM suggests investors view the transaction favorably for the US’ largest bank. Of note, this is the fourth US bank to fail in less than two months—three have been taken into receivership and one decided to liquidate. Outside the US, Credit Suisse needed an acquisition by UBS to help resolve their challenges.

First Republic has been important because its resolution could establish a fire line, as the last large bank to have the combination of large unrecognized losses on its held-to-maturity portfolio and a large percentage of uninsured deposits.

Next Phase

To be clear, further banking system stresses or failures could happen from here, but this was the event that we were waiting for to clear the air of the acute phase of failures set off in March. While the stress to date has been on the liability side of bank balance sheets (i.e., deposits), it may move to the asset side as bank loan books come under some pressure as the economy slows.

With First Republic’s situation resolved and the market reacting to it calmly, the Federal Reserve should be able to press ahead with its expected 25 b.p. interest rate hike this week. Between the rise in rates to date and the anticipated pullback in lending by banks, we expect financial conditions to continue to tighten, leading to further slowing in the economy and bringing inflation down closer to the Fed’s 2% target. Earnings are likely to fall further, and the market will be range bound for the better part of 2023 until the landscape clears, in our opinion.

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