How Washington Got on Board With a Big-Bank Deal for First Republic
5 min read 02 May 2023, 05:56 PM IST JPMorgan, the biggest U.S. lender, beat out bids from at least three smaller peers
PremiumFederal regulators wanted a strong deal for First Republic Bank. As a result, they helped America’s largest lender get even bigger.
JPMorgan Chase beat out bids from at least three smaller peers, according to people familiar with the matter. The bank said it had some 800 people working over the weekend to scour First Republic’s books and assess its business.
JPMorgan was also the only bank with the appetite to buy substantially all of First Republic at a competitive price, the people said, including mortgages that other banks didn’t want. That was a priority for the Federal Deposit Insurance Corp. because it removed uncertainty over any assets left behind that it would have to sell.
Some politicians and regulators have become concerned that growth and consolidation have created banks that present risks to financial stability. Officials have sought to put new limits on bank mergers to prevent large banks from getting even bigger. But with the First Republic sale, they set those concerns aside, a recognition that the largest lenders possess unmatched firepower to step in during times of financial stress.
The recent bout of banking turmoil is poised to help the largest banks grow further, reinforcing their already pronounced dominance.
“I’m not opposed to what was done, but I do think the lack of options speaks to a truly bankrupt resolution process," said Karen Petrou, managing partner of Federal Financial Analytics, a regulatory advisory firm for the banking industry.
The largest U.S. banks grew rapidly in the decade after the last financial crisis, benefiting in part from the presumption that they were too important to the financial system to be allowed to fail. They became fabulously profitable, putting them in position to weather the regional bank meltdown of the last two months—and even thrive. JPMorgan led a group of 11 banks to temporarily rescue First Republic in March by depositing $30 billion at the bank to help replenish the money that customers withdrew in a panic after two midsize banks failed in one weekend.
The growth has stirred concerns that the big banks have become too powerful. The Biden administration and some FDIC officials have taken a skeptical attitude toward bank mergers that could accelerate their growth.
Sen. Elizabeth Warren (D., Mass.), a big-bank critic, said the deal showed that the problem of “too big to fail" banks has gotten worse. She told the Boston Globe that regulators shouldn’t have allowed JPMorgan to buy First Republic.
The FDIC, which orchestrated the plan to seize First Republic and sell it, typically must accept the bid that imposes the smallest cost on its deposit insurance fund. JPMorgan’s bid cost the fund some $13 billion, better than the others’ best bids, but not by an enormous amount, some of the people familiar with the matter said.
A regulatory official defended selling the firm to JPMorgan, saying regulators were hamstrung by legal requirements that the winning bank provide the lowest-cost bid. Deviating would have cost the fund an additional, not insignificant, amount of money borne by all banks, including small community lenders, the official said.
Regulators opted to sell First Republic over the weekend at least partly on the strength of what are called indicative bids that the FDIC received on Friday from JPMorgan and others. They worried that pushing the sale out past the weekend could test the resolve of the bidders while First Republic was in free fall, the people said. In the end, the FDIC received final bids Sunday from three other banks—PNC Financial Services Group, Citizens Financial Group and Fifth Third Bancorp—people familiar with the decision said, but JPMorgan’s was deemed lowest-cost.
JPMorgan was allowed to bypass a restriction that normally would prevent it from buying other banks because it holds more than 10% of all U.S. deposits. The rule doesn’t apply for the purchase of a failing bank. The Office of the Comptroller of the Currency, JPMorgan’s primary regulator, has broad authority to block deals involving banks it oversees and didn’t object. A merger approval letter released by the OCC on Monday raised no concerns about the deal.
“The cap, I think, has always been given up in deals like this for the sake of the system," JPMorgan Chief Executive Jamie Dimon said on a call with analysts Monday morning, referring to the 10% deposit limit.
After the FDIC selected the winning bid for First Republic, the OCC “applied the statutory and regulatory rules" for approving the purchase, an OCC spokeswoman said.
Rep. Ro Khanna (D., Calif.) said that the JPMorgan deal wasn’t an ideal solution and that it increases concentration in the banking sector. But he said the FDIC had to find the least-cost option.
“The FDIC is coming in when you have a five-alarm fire and they’re coming in when there’s a forest fire, and they put out the fire, so I support that," he said. “It’s unfortunate it came to that."
First Republic’s failure contrasts with that of Silicon Valley Bank, which was seized by the FDIC in March after a smartphone-fueled run on deposits. The FDIC took control of the bank before it could line up a buyer. A hasty bidding process in the immediate days after yielded no buyers that would cost the insurance fund less than liquidating the bank.
Federal regulators stepped in to guarantee that all depositors would be made whole, regardless of the amount of money in their accounts. Officials invoked emergency authority that gave them discretion to avoid a least-cost requirement on the insurance fund they oversee, allowing them to more easily sell the bank while guaranteeing its uninsured deposits.
Ultimately, much of SVB was sold to another midsize bank in a follow-up bidding process a few weeks later. But meanwhile, some value had seeped out of the bank as customers withdrew deposits. The resolution is estimated to cost the deposit insurance fund $20 billion.
Senior administration officials have said they would use those emergency authorities again if needed. But it might have been more difficult this time around.
Jonathan McKernan, one of two Republicans on the five-member FDIC board, told other officials he was reluctant to repeatedly turn to that authority to backstop uninsured deposits, without congressional approval for broader action. “Any decision to use the FDIC’s emergency powers should be approached skeptically," he said Monday.