First Republic is gone, but banking turmoil may linger

Will it be the last one?

That is the big question after First Republic Bank, a California lender with a valuable franchise in Massachusetts, was taken over by federal regulators and sold to JPMorgan Chase in the wee hours of Monday morning.

It was the third US bank failure since March, when Silicon Valley Bank and Signature Bank collapsed.

Although it hung on longer, First Republic was felled by the same forces as the other two regional lenders: rising interest rates and an exodus of depositors that left a gaping hole in its balance sheet.

The relatively painless outcome of the government’s action — depositors won’t lose any money and had access to their accounts first thing Monday — brought hope the worst of the recent banking turmoil may be over.

“This is getting near the end of it, and, hopefully, this helps stabilize everything,” JPMorgan Chase chief executive Jamie Dimon said on a conference call. “The American banking system is extraordinarily sound.”

But investors aren’t so sure.

After opening higher on Monday, bank stocks retreated and ended the day lower. A notable exception: JPMorgan, which rose 2.1 percent, reflecting the view that it cut a good deal with the Federal Deposit Insurance Corp.

Shares of Providence-based Citizens Financial Group lost 6.9 percent. It was among the banks that were asked by the FDIC to submit bids for First Republic. The bank didn’t respond to a Boston Globe e-mail seeking comment. Another bidder, PNC Financial Services Group, fell 6.3 percent.

Even if no other large banks fail in coming months, the industry will remain under pressure, a prospect that doesn’t bode well for the economy here or across the country.

The Federal Reserve is widely expected to lift interest rates for the 10th straight time on Wednesday, and keep them elevated until inflation is under control. Steeper rates reduce the value of a bank’s loans and investments, and makes it more expensive to attract deposits.

The Marriner S. Eccles Federal Reserve building in Washington, D.C. on Sept. 17, 2021. Stefani Reynolds/Bloomberg

In response, banks are getting pickier about the loans they will make. The fear is the pullback will push the economy, which is already slowing, into a recession.

Gross domestic product, the broadest measure of the economy, rose at an 1.1 percent annual rate in the first quarter, the Commerce Department said last week, down from 2.6 percent in the last three months of 2022.

First Republic is the second largest US bank to go under, following Washington Mutual in 2008, which JPMorgan also absorbed. The bank had $17.8 billion in Massachusetts deposits as of June 2022, according to the most recent FDIC data, ranking it seventh in the state.

Its demise will be most keenly felt by its largely affluent retail customers who were drawn to the bank by its high-touch personal services.

“They are the best bank anywhere,” customer Faith Moore said as she exited First Republic’s Harvard Square branch. “They have taken care of me through thick and thin,” she said, and when her computer was hacked recently, the bank was “amazing about it.”

First Republic was a leading lender of jumbo mortgages in Massachusetts and made deep inroads into wealthy corners of Boston by writing loans on luxury condos downtown and seven-figure suburban manses.

“It was the Four Seasons of banks,’ said Maggie Gold Seelig, founder of luxury residential brokerage MGS Group Real Estate. “When First Republic says they can get something done, they can get something done.”

Single-family real estate accounted for 60 percent of the bank’s loans nationally. However, about one-fifth of its lending went to multifamily and commercial real estate, with another 12 percent allocated to lines of credit and business loans.

Bruce Percelay, founder of The Mount Vernon Co. and a First Republic customer since 2006, said he laments the loss of an institution that helped real estate developers like himself grow by offering efficient loan processes and attractive rates.

First Republic’s demise won’t have the same impact as the failure of Silicon Valley Bank, which specialized in funding tech startups, because developers have many other options for financing.

Still, Percelay sees the death of First Republic as yet another headwind for the real estate industry, already reeling from high interest rates, soaring construction costs, a looming recession, and proposed Boston housing policies that could hamper growth.

“Pick your poison,” said Percelay. “This is just one more event that could negatively impact the real estate market.”

A passerby stops to read a posted announcement from the FDIC about the seizure of First Republic Bank and sale to JPMorgan Chase on May 1, 2023 in San Francisco, California.Justin Sullivan/Getty

JPMorgan Chase has been bulking up in Massachusetts since it opened its first Chase Bank branch here in late 2018. Last August, Dimon said he was aiming to reach 90 branches in the state by the end of 2025, up from 36. First Republic has five Massachusetts branches.

Senator Elizabeth Warren said federal regulators should not have allowed JPMorgan Chase to buy First Republic because it makes the nation’s largest bank even bigger and potentially puts taxpayers at greater risk down the line.

“I’m very concerned about the deal the FDIC cut. The too-big-to fail problem just got bigger,” the Massachusetts Democrat said. “JPMorgan Chase ends up with an even bigger balance sheet and ultimately it is the US taxpayer that backstops it.”

She acknowledged that JPMorgan faces tougher regulatory scrutiny than regional banks like First Republic and Silicon Valley Bank, but “whether that scrutiny is tough enough remains to be seen.”

US Representative Jake Auchincloss, a Newton Democrat, said the size of the nation’s largest banks like JPMorgan Chase has been a congressional concern since the 2008 financial crisis. But he said the first order of business for regulators with First Republic Bank was to use “bold, decisive action” to stop any potential spillover of its problems into other regional banks.

“Do not let fear percolate throughout the depositor base in such a way as to topple otherwise solvent banks,” he said.

Now, regulators need to make sure smaller regional banks heal from the recent financial trauma so they “can continue to make loans to Main Street businesses and developers,” Auchincloss said. Meanwhile, lawmakers need to insure that banking regulators address the problems they identified in reports last week about their oversight of Silicon Valley Bank before it failed, he said.

The risk of bank runs could be significantly reduced by raising deposit insurance protection for businesses, the FDIC said in a report Monday. That was one of three options laid out in the report, which also examined putting no limit on FDIC coverage or raising the existing $250,000 cap.

In many ways, the demise of First Republic has been taking place in slow motion. Its resolution may feel anticlimactic, but that’s OK, said Tom O’Brien, chief executive of HYM Investment Group, a First Republic customer and the firm redeveloping Suffolk Downs and the Government Center garage.

“Given the economy, no drama is good,” O’Brien said.

Shirley Leung, Jim Puzzanghera, Catherine Carlock, and Dana Gerber of the Globe staff contributed to this story.

Larry Edelman can be reached at larry.edelman@globe.com. Follow him @GlobeNewsEd.