JPMorgan Allowed to Buy First Republic by US Government

Get WSJ Print Edition.- JPMorgan Chase, America’s largest lender, acquired First Republic Bank with the assistance of federal regulators who were keen to ensure a strong deal. JPMorgan Chase outbid at least three smaller banks and was the only bank willing to purchase all of First Republic’s assets, including mortgages that other banks had rejected. This was a priority for the Federal Deposit Insurance Corp (FDIC) to remove uncertainty over any unsold assets left behind.

While some politicians and regulators have expressed concern over the growth and consolidation of banks and their risks to financial stability, the sale of First Republic shows that larger lenders possess unmatched firepower to step in during times of financial stress. Since the last financial crisis, the largest U.S. banks have grown significantly, in part because they benefited from the presumption that they were too important to the financial system to be allowed to fail. However, this growth has also raised concerns that these big banks have become too powerful. The Biden administration and some FDIC officials have taken a skeptical attitude towards 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.

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The FDIC, which orchestrated the plan to seize First Republic and sell it, must typically accept the bid that imposes the smallest cost on its deposit insurance fund. JPMorgan’s bid cost the fund around $13 billion, better than the others’ best bids, but not by a significant amount.

JPMorgan and other bidders submitted indicative bids on Friday, which led regulators to opt for the sale of First Republic over the weekend. They worried that pushing the sale out past the weekend could test the resolve of the bidders while First Republic was in free fall. In the end, the FDIC received final bids on Sunday from three other banks—PNC Financial Services Group, Citizens Financial Group, and Fifth Third Bancorp—but JPMorgan’s was deemed lowest-cost.

JPMorgan was allowed to bypass a restriction that would normally prevent it from buying other banks because it holds more than 10% of all U.S. deposits. However, this rule doesn’t apply to the purchase of a failing bank. The Office of the Comptroller of the Currency (OCC), JPMorgan’s primary regulator, has broad authority to block deals involving banks it oversees, but it did not object to this acquisition. A merger approval letter released by the OCC on Monday raised no concerns about the deal.

First Republic’s failure contrasts with that of Silicon Valley Bank, which was seized by the FDIC in March after a 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.

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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 Silicon Valley Bank 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 it lingered in limbo, according to people familiar with the matter.

Karen Petrou, managing partner of Federal Financial Analytics, a regulatory advisory firm for the banking industry, expressed concern about the lack of options available for the First Republic deal. While she was not opposed to the decision, she believed it spoke to a truly bankrupt resolution