Lawmakers and regulators have spent years crafting laws and regulations designed to limit the power and size of America’s largest banks. But those efforts were brushed aside in a frantic overnight effort by government officials to contain a banking crisis by seizing First Republic Bank and selling it to the nation’s largest bank, JPMorgan Chase.
At about 1 a.m. Monday, hours after the Federal Deposit Insurance Corporation was expected to announce a buyer for the troubled regional lender, government officials informed JPMorgan executives that they had secured the right to collect First Republic and the accounts of its wealthy clients, the most in affluent coastal cities and suburbs.
The FDIC’s decision appears to have put an end to nearly two months of simmering turmoil in the banking sector that followed the sudden collapse of Silicon Valley Bank and Signature Bank in early March. “This part of the crisis is over,” Jamie Dimon, CEO of JPMorgan, 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 resolution has also raised long-running debates about whether some banks have become too big to fail, in part because regulators have allowed or even encouraged them to take over smaller financial institutions, especially during crises. .
“Regulators view them as adults and business partners,” said Tyler Gellasch, president of the Healthy Markets Association, a Washington-based group that advocates for greater transparency in the financial system, referring to major banks such as JPMorgan. “They’re too big to fail and they’re privileged to be.”
He added that JPMorgan would likely make a lot of money from the acquisition. JPMorgan said Monday it expected the deal to boost earnings by $500 million this year.
JPMorgan pays the FDIC $10.6 billion to acquire First Republic. The government agency expects to cover a loss of approximately $13 billion on First Republic’s assets.
Normally, a bank can’t take over another bank if doing so would allow it to control more than 10 percent of the country’s bank deposits — a threshold JPMorgan had already reached before buying First Republic. But the law contains an exception for the takeover of a bankrupt bank.
The FDIC polled banks to see if they were willing to take First Republic’s uninsured deposits and if their primary regulator would allow them to do so, according to two people familiar with the process. Friday afternoon, the regulator invited the banks to a virtual data room to view First Republic’s financial records, the two people said.
The government agency, which worked with investment bank Guggenheim Securities, had plenty of time to prepare for the auction. First Republic has struggled since the bankruptcy of Silicon Valley Bank, despite receiving a $30 billion bailout from 11 of the country’s largest banks in March, an effort spearheaded by Mr. Dimon of JPMorgan.
By the afternoon of April 24, it had become increasingly clear that First Republic could not stand on its own. That day, the bank announced in its quarterly results 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.
Prior to the earnings announcement, First Republic’s lawyers and other advisers told the bank’s senior executives not to answer any questions on the company’s conference call, according to a person briefed on the matter, due to the plight of the bank.
The report’s revelations and executives’ silence terrified investors, who dumped the already-beaten stock.
When the FDIC began the First Republic sale process, several bidders, including PNC Financial Services, Fifth Third Bancorp, Citizens Financial Group and JPMorgan, expressed interest. Analysts and executives at those banks began sifting through First Republic’s data to find out how much they’d be willing to bid and submitted bids early Sunday afternoon.
Regulators and Guggenheim then returned to the four bidders and asked them for their best and final bid by 7pm ET. Every bank, including JPMorgan Chase, improved its offer, two of the people said.
Regulators had indicated they planned to declare a winner at 8 p.m., before markets opened in Asia. PNC executives had spent much of the weekend at the bank’s Pittsburgh headquarters preparing their offer. Executives at Citizens, based in Providence, RI, gathered in offices in Connecticut and Massachusetts.
But 8 p.m. rolled by with no word from the FDIC. Several hours of silence followed.
For the three smaller banks, the deal would have been transformative, giving them a much larger presence in wealthy places like the San Francisco Bay Area and New York City. PNC, the sixth-largest U.S. bank, is said to have strengthened its position to challenge the country’s four major commercial lenders: JPMorgan, Bank of America, Citigroup and Wells Fargo.
In the end, JPMorgan not only offered 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 be able to more easily integrate First Republic’s branches into its business and manage the smaller bank’s loans and mortgages by holding or selling them. said the two people.
While executives at the smaller banks waited for their phones to ring, the FDIC and its advisers negotiated with Mr. Dimon and his team, who, according to one person, were seeking assurances that the government would indemnify JPMorgan against losses.
At around 3 a.m., the FDIC announced that JPMorgan would acquire First Republic.
A spokesman for the FDIC declined to comment on other bidders. In its statement, the agency said, “First Republic Bank’s resolution involved a highly competitive bidding process and resulted in a transaction that complied with the lowest cost requirements of the Federal Deposit Insurance Act.”
The announcement was widely praised in the financial industry. Robin Vince, the president and chief executive of Bank of New York Mellon, said in an interview that it felt “like a cloud has lifted.”
Some financial analysts warned that the celebrations could be overdone.
Many banks still have hundreds of billions of dollars in unrealized losses on government bonds and mortgage-backed securities purchased when interest rates were very low. Some of those bond investments are now worth much less because the Federal Reserve has raised interest rates sharply to bring inflation down.
Christopher Whalen of Whalen Global Advisors said the Fed fueled some of the trouble in banks like First Republic with easy money policies that led them to buy bonds that are now underperforming. “This problem is not going to go away until the Fed cuts interest rates,” he said. “Otherwise we will see even more banks go bankrupt.”
But Mr. Whalen’s opinion is a minority opinion. The growing consensus is that the failures of Silicon Valley, Signature and now First Republic will not lead to a repeat of the 2008 financial crisis that toppled Bear Stearns, Lehman Brothers and Washington Mutual.
The assets of the three banks that failed this year are greater, after adjusting for inflation, than all 25 banks that failed in 2008. But a total of 465 banks went bankrupt between 2008 and 2012.
An unresolved issue is how to deal with banks that still have a high percentage of uninsured deposits — customer money well above the $250,000 federally insured limit on deposits. The FDIC on Monday recommended that Congress consider expanding its ability to protect deposits.
Many investors and savers already assume that the government will step in to protect all deposits in a failing institution by invoking a systemic risk exception – something they did with Silicon Valley Bank and Signature Bank. But that is easy if only a few banks get into trouble and more difficult if many banks are in trouble.
Another looming concern is that medium-sized banks will pull back lending to preserve capital if they fall victim to the kind of bank runs that happened at Silicon Valley Bank and First Republic. Depositors can also move their savings into money market funds, which typically offer higher returns than savings or checking accounts.
Medium-sized banks should also brace themselves for closer scrutiny from the Fed and FDIC, which self-criticized in reports published last week about March’s bank failures.
Regional and community banks are the primary source of funding for the commercial real estate industry, which includes office buildings, apartment complexes and shopping centers. An unwillingness of banks to lend money to developers can hinder plans for new construction.
Any decline in lending could lead to a slowdown in economic growth or a recession.
Some experts said that despite those challenges and concerns about big banks’ growth, regulators have done an admirable job of restoring stability to the financial system.
“It was an extremely difficult situation, and given how difficult it was, I think it was well done,” said Sheila Bair, president of the FDIC during the 2008 financial crisis. “It means that big banks get bigger when smaller banks going bankrupt is inevitable,” she added.
Reporting contributed by Emily Flasher, Alan Reportport, Robert Copeland And Jeanna Smilek.
