Lawmakers and regulators have spent years creating laws and rules aimed at limiting the power and size of America’s largest banks. But those efforts were brushed aside in a frantic late-night attempt by government officials to contain a banking crisis by taking over First Republic Bank and selling it to the country’s largest bank, JPMorgan Chase.
At about 1 a.m. Monday, hours after the Federal Deposit Insurance Corporation announced a buyer for the troubled regional lender, government officials informed JPMorgan executives that they had won the right to acquire First Republic and the high-caliber accounts. Customers, mostly in the affluent coastal cities and suburbs.
The FDIC decision, for now, appears to have quelled nearly two months of seething turmoil in the banking sector that followed the sudden collapse of Silicon Valley and Signature Bank in early March. “That part of the crisis is over,” JPMorgan CEO Jamie Dimon told analysts Monday on a conference call to discuss the acquisition.
For Mr. Dimon, it was a repeat of his role in the 2008 financial crisis when JPMorgan acquired Bear Stearns and Washington Mutual at the behest of federal regulators.
But the First Republic’s decision also brought to light long-running debates about whether some banks became too big to fail in part because regulators allowed or even encouraged them to take over smaller financial institutions, especially during crises.
“Regulators view them as adults and business partners,” said Tyler Gelach, president of the Healthy Markets Association, a Washington-based group that advocates for greater transparency in the financial system, referring to big banks like JPMorgan. “They are too big to fail and they are privileged to be.”
He added that JPMorgan is likely to make a lot of money from the acquisition. JPMorgan said on Monday it expects the deal to raise its earnings this year by $500 million.
JPMorgan will pay FDIC $10.6 billion to acquire First Republic. The government agency expects to cover losses of about $13 billion in First Republic assets.
Normally a bank could not acquire another if doing so would allow it to control more than 10 per cent of the country’s bank deposits – a limit JPMorgan had already reached before buying the First Republic. But the law includes an exception for taking over a troubled bank.
The FDIC researched banks to see if they were willing to take First Republic’s uninsured deposits and whether their primary regulator would allow them to do so, according to two people familiar with the process. On Friday afternoon, the two officials said, the regulator invited the banks into a virtual data room to look at First Republic’s financial statements.
The government agency, which was working with investment bank Guggenheim Securities, had plenty of time to prepare for the auction. First Republic has been struggling since the Silicon Valley bank failure, despite receiving a $30 billion lifeline in March from 11 of the country’s largest banks, an effort spearheaded by JPMorgan’s Dimon.
By the afternoon of April 24, it was becoming increasingly clear that the First Republic could not stand alone. That day, the bank revealed in its quarterly earnings report that it had lost $102 billion in customer deposits in the last weeks of March, or more than half of what it had at the end of December.
Before the earnings announcement, lawyers for the First Republic and other advisors told the bank’s top executives not to answer any questions on the company’s conference call, according to a person familiar with the matter, because of the bank’s dire situation.
The disclosure of the report and the silence of the executives spooked investors, who dumped its already battered shares.
When the FDIC began the process of selling First Republic, several bidders including PNC Financial Services, Fifth Third Bancorp, Citizens Financial Group, and JPMorgan expressed interest. Analysts and executives at those banks began looking at First Republic data to see how ready they were to bid and bid by early Sunday afternoon.
The regulators and the Guggenheim then went back to the four bidders, asking them for their best final bids by 7 p.m. ET, and each bank, including JPMorgan Chase, had improved its bid, two of the people said.
The organizers have indicated that they intend to announce the winner by 8pm, before the markets open in Asia. PNC executives spent much of the weekend at the bank’s Pittsburgh headquarters putting together its bid. Citizens executives, headquartered in Providence, RI, gathered in offices in Connecticut and Massachusetts.
But 8 p.m. with no word from the FDIC was followed by several hours of silence.
For the three smaller banks, the deal would have been transformative, giving them a much larger presence in affluent places like the San Francisco Bay Area and New York City. PNC, the sixth largest bank in the United States, was going to strengthen its position to challenge the country’s four big commercial banks – JPMorgan, Bank of America, Citigroup and Wells Fargo.
In the end, JPMorgan didn’t offer more money than others and agreed to buy the vast majority of the bank, two people familiar with the process said. Regulators were also more inclined to accept the bank’s offer because JPMorgan would likely have an easier time integrating First Republic subsidiaries into its business and managing the bank’s smaller loans and mortgages by either holding onto them or selling them, the two people said.
While small bank executives waited for their phones to ring, the FDIC and its advisors continued negotiating with Mr. Dimon and his team, who were seeking assurances that the government would protect JPMorgan from losses, according to one of the people.
At about 3 a.m., the FDIC announced that JPMorgan will acquire First Republic.
A FDIC spokesman declined to comment on the other bidders. “First Republic Bank’s decision involved a highly competitive bidding process and resulted in a transaction consistent with the lowest-cost requirements of the FDIC,” the agency said in its statement.
The announcement was widely praised in the financial industry. Robin Vince, president and CEO of Bank of New York Mellon, said in an interview that it felt “like the cloud had been removed.”
Some financial analysts have warned that the celebrations may be overblown.
Many banks still had hundreds of billions of dollars in unrealized losses on Treasury bills and mortgage-backed securities purchased when interest rates were very low. Some of those bond investments are worth much less now because the Federal Reserve has sharply raised interest rates to bring down inflation.
Christopher Whalen of Whalen Global Advisors said the Fed has fueled some problems in banks like the First Republic with an easy monetary policy that has led them to overload bonds that are now performing poorly. “This problem will not go away until the Fed lowers interest rates,” he said. “Otherwise, we will see more banks fail.”
But Mr. Wallen’s view is that of a minority. The growing consensus is that the failures of Silicon Valley, Signature, and now the First Republic will not lead to a repeat of the 2008 financial crisis that brought down Bear Stearns, Lehman Brothers, and Washington Mutual.
The assets of the three banks that failed this year are greater than the 25 banks that failed in 2008 after adjusting for inflation. but 465 banks failed in total from 2008 to 2012.
One unresolved problem is how to deal with banks that still have a high percentage of uninsured deposits — money from customers well in excess of the federally insured $250,000 maximum on deposits. The Federal Deposit Insurance Corporation (FDIC) recommended Monday that Congress consider expanding its deposit protection capacity.
Many investors and depositors already assume that the government will step in to protect all deposits in a failing institution by invoking the exception of systemic risk — which they have done with Silicon Valley and Signature Bank. But it is easy to do when there are only a few banks in trouble and much more difficult if many banks are in trouble.
Another looming concern is that mid-cap banks will hold back on lending to preserve capital if they are subject to the kind of bank run operations that happened at Silicon Valley Bank and First Republic. Depositors may also move their savings into money market funds, which tend to offer higher returns than savings or checking accounts.
Mid-size banks also need to prepare for more rigorous oversight from the Fed and the FDIC, which were self-critical in reports last week about bank failures in March.
Regional and community banks are the main source of financing for the commercial real estate industry, which includes office buildings, apartment complexes, and shopping centers. Unwillingness of banks to lend to developers may hinder plans for new construction.
Any decline in lending could lead to a slowdown in economic growth or recession.
Some experts said that despite those challenges and concerns about big banks getting bigger, regulators have done a great job of restoring stability to the financial system.
“It was a very difficult situation, and given how difficult it was, I think it was done well,” said Sheila Beer, who was the FDIC president during the 2008 financial crisis. “It means big banks get bigger when smaller banks start to collapse is inevitable,” she added.
Contribute to the preparation of reports Emily FlitterAnd Alan RapportAnd Rob Copeland And Jenna Smyalek.
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