Lawmakers and regulators have spent years introducing laws and regulations intended to limit the power and size of America’s largest banks. But those efforts were swept aside in a frantic late-night effort by government officials to contain a banking crisis by seizing and selling First Republic Bank to the nation’s largest bank, JPMorgan Chase.
At about 1 a.m. Monday, hours after the Federal Deposit Insurance Corporation had expected to announce a buyer for the troubled regional lender, government officials informed JPMorgan executives that they had won the right to take over First Republic and its well-kept accounts. customers, most of them in wealthy coastal towns and suburbs.
For now, the FDIC’s decision appears to have quelled 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, JPMorgan’s chief executive, told analysts Monday in a conference call to discuss the acquisition.
For Mr. Dimon, it was a reprise of his role in the 2008 financial crisis when JPMorgan bought Bear Stearns and Washington Mutual at the behest of federal regulators.
But the First Republic resolution has also rekindled long-standing debates about whether some banks have become too big to fail, in part because regulators have allowed or even encouraged them to acquire 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 big banks like JPMorgan. “They are too big to fail, and they are given the privilege to be.”
He added that JPMorgan would likely make a lot of money from the acquisition. JPMorgan said on Monday that it expected the deal to boost profits this year by $500 million.
JPMorgan will pay the FDIC $10.6 billion to buy First Republic. The government agency expects to cover a loss of about $13 billion on First Republic’s assets.`
Normally, a bank cannot acquire another bank if doing so would allow it to control more than 10 percent of the nation’s bank deposits — a threshold JPMorgan had already reached before buying First Republic. But the law contains an exception for the acquisition of a failing bank.
The FDIC was hearing from banks to see if they would be 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. On Friday afternoon, the regulator invited the banks into a virtual computer room to look at First Republic’s finances, the two people said.
The public agency, which collaborated with the investment bank Guggenheim Securities, had plenty of time to prepare the auction. First Republic had struggled since the failure of Silicon Valley Bank, despite receiving a $30 billion lifeline in March from 11 of the nation’s largest banks, an effort led by Mr. Dimon of JPMorgan.
By the afternoon of April 24, it had become increasingly clear that the First Republic could not stand on its own. That day, the bank revealed in its quarterly 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.
Ahead of the earnings announcement, First Republic’s lawyers and other advisers told the bank’s top executives not to answer any questions on the company’s conference call, according to a person briefed on the matter, because of the bank’s dire situation.
The revelations in the report and the executives’ silence spooked investors, who dumped their already depressed 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 poring over First Republic’s data to determine how much they would 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 offer by 19.00. Each bank, including JPMorgan Chase, improved its offering, two of the people said.
Regulators had indicated they planned to announce a winner by 8pm, before markets in Asia opened. PNC executives had spent much of the weekend at the bank’s Pittsburgh headquarters putting together the bid. Executives at Citizens, which is based in Providence, RI, gathered in offices in Connecticut and Massachusetts.
But 8pm rolled by with nothing 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 affluent places like the San Francisco Bay Area and New York City. PNC, which is the sixth largest US bank, would have strengthened its position to challenge the country’s big four 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 likely would have an easier time integrating First Republic’s branches into its business and managing the smaller bank’s loans and mortgages either by holding on to them or selling them, the two people said.
As executives at the smaller banks waited for their phones to ring, the FDIC and its advisers continued to negotiate with Mr. Dimon and his team, seeking assurances that the government would insure JPMorgan against losses, according to one of the people.
Around 3 a.m., the FDIC announced that JPMorgan would buy First Republic.
An FDIC spokesman declined to comment on other bidders. In its statement, the agency said, “The dissolution of First Republic Bank involved a highly competitive bidding process and resulted in a transaction in compliance with the minimum cost requirements of the Federal Deposit Insurance Act.”
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 a cloud has been lifted.”
Some financial analysts warned that the celebrations may be overblown.
Many banks still have hundreds of billions of dollars in unrealized losses on government bonds and mortgage-backed securities bought when interest rates were very low. Some of these bond investments are now worth much less because the Federal Reserve has raised interest rates sharply to bring down inflation.
Christopher Whalen of Whalen Global Advisors said the Fed fueled some of the problems at banks like First Republic with easy money policy that led them to load up on bonds that are now underperforming. “This problem will not go away until the Fed lowers interest rates,” he said. “Otherwise we will see more banks fail.”
But Mr. Whalen’s view is a minority view. 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 brought down Bear Stearns, Lehman Brothers and Washington Mutual.
The assets of the three banks that went bankrupt this year are greater than the 25 banks that went bankrupt in 2008 after adjusting for inflation. But 465 banks failed in total from 2008 to 2012.
An unresolved issue is how to deal with banks that still have a high percentage of uninsured deposits – money from customers that are well over the $250,000 federally insured deposit limit. The FDIC recommended Monday that Congress consider expanding its ability to protect deposits.
Many investors and depositors already assume that the government will step in to protect all deposits at any failing institution by invoking a systemic risk exemption — something they did with Silicon Valley Bank and Signature Bank. But it is easy to do when only a few banks are having problems, and more difficult if many banks are having problems.
Another looming concern is that mid-sized banks will pull back on lending to preserve capital if they are subject to the kind of bank runs that took place at Silicon Valley Bank and First Republic. Depositors can also move their savings into money market funds, which tend to offer higher returns than savings or checking accounts.
Mid-sized banks must also prepare for tougher oversight from the Fed and FDIC, which criticized itself in reports released last week on the March bank failures.
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. The banks’ unwillingness to lend 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 these challenges and concerns about big banks getting bigger, 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, who chaired the FDIC during the 2008 financial crisis. falling is inevitable,” she added.
Reporting was contributed by Emily Flitter, Alan Rappeport, Rob Copeland and Jeanna Smialek.