Lawmakers and regulators have developed laws and regulations over the years that limit the power and size of the largest U.S. banks. But those efforts were abandoned in a frantic late-night effort by government officials to contain the banking crisis by taking over First Republic Bank and selling it to JPMorgan Chase, the nation’s largest bank.
At 1 a.m. Monday, hours after the Federal Deposit Insurance Corp. was expected to announce a buyer of the troubled regional lender, government officials told JPMorgan executives they had won the right to take over First Republic. Customers, most of whom are in wealthy coastal towns and suburbs.
The FDIC’s decision eases nearly two months of turmoil in the banking industry following the collapse of Silicon Valley Bank and Signature Bank in early March. “This part of the crisis is over,” JP Morgan Chief Executive Jamie Dimon told analysts on a conference call to discuss the acquisition on Monday.
Mr. For Dimon, the 2008 financial crisis saw the takeover of JP Morgan Bear Stearns and Washington Mutual at the behest of federal regulators.
But First Republic’s decision has brought to the fore long-running debates about whether some banks have become too big because regulators have allowed or encouraged them to buy smaller financial institutions, especially during crises.
“Regulators see them as adults and business partners,” said Tyler Kellach, president of the Washington-based Healthy Markets Association, which advocates for greater transparency in the financial system, representing big banks such as JPMorgan. “They are big enough to fail and they are privileged to be so.”
He said JPMorgan is likely to make a lot of money from the acquisition. JPMorgan said Monday that the deal is expected to boost its profits by $500 million.
JP Morgan will pay the FDIC $10.6 billion to acquire First Republic. The government agency expects to cover the loss of about $13 billion in First Republic assets.`
Normally one bank cannot acquire another if it does so and can control more than 10 percent of the nation’s bank deposits — a limit JPMorgan had already reached before buying First Republic. But the law includes an exception for taking over a failed bank.
The FDIC is looking to see if banks are willing to take on First Republic’s uninsured deposits and whether their primary regulator will allow them to do so, said two people familiar with the process. On Friday afternoon, the regulator invited the banks into a virtual data room to look at First Republic’s financials, two of the people said.
The government agency, which works with investment bank Guggenheim Securities, had plenty of time to prepare for the bid. JP Morgan’s Mr. Despite receiving a $30 billion lifeline in March from the nation’s 11 largest banks led by Dimon, First Republic has been struggling since the failure of Silicon Valley Bank.
By the afternoon of April 24, it was becoming increasingly clear that the First Republic could not stand alone. On that day, the bank said 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 held at the end of December.
Ahead of the earnings release, First Republic’s lawyers and other advisers told the bank’s senior executives not to answer any questions on the company’s conference call because of the bank’s dire situation, according to a person briefed on the matter.
The revelations in the report and the executives’ silence spooked investors, who dumped already battered stocks.
When the FDIC began the process of selling First Republic, several bidders expressed interest, including PNC Financial Services, Fifth Third Bancorp, Citizens Financial Group and JP Morgan. Analysts and executives at those banks began looking at First Republic’s data on Sunday afternoon to gauge how much they would be willing to bid.
Regulators and Guggenheim then returned to the four bidders, asking them for their best and final offers by 7 p.m. Each bank, including JPMorgan Chase, upgraded its offering, the two said.
Regulators have indicated they plan to announce the winner by 8 p.m., before markets open in Asia. PNC executives put together its bid at the bank’s Pittsburgh headquarters over the weekend. Based in Providence, RI, Citizens’ executives meet in offices in Connecticut and Massachusetts.
But it was 8 p.m., followed by hours of silence with no word from the FDIC.
For the three smaller banks, the deal would have been transformative, giving them a much larger presence in affluent locations like the San Francisco Bay Area and New York City. PNC, the sixth-largest U.S. bank, would have strengthened its position to challenge the nation’s four largest commercial lenders: JPMorgan, Bank of America, Citigroup and Wells Fargo.
In the end, JPMorgan not only offered more money than others, but also agreed to buy most of the bank, two people familiar with the process said. Regulators also wanted to accept the bank’s offer because JPMorgan would have an easier time integrating First Republic branches into its business and managing the smaller bank’s loans and mortgages, either by holding or selling them.
As executives at smaller banks waited for their phones to ring, the FDIC and its advisers called Mr. Dimon and his team continued to negotiate, trying to reassure JPMorgan that the government would protect them from losses.
Around 3 a.m., the FDIC announced that JP Morgan would acquire First Republic.
An FDIC spokeswoman declined to comment on the other bidders. In its statement, the company said, “First Republic Bank’s decision involved a highly competitive bidding process and resulted in a transaction consistent with the minimum cost requirements of the Federal Deposit Insurance Act.”
The announcement was widely applauded in the financial sector. Robin Vince, president and chief executive of Bank of New York Mellon, said in an interview that it felt like “a cloud had been lifted.”
Some financial analysts cautioned that the celebrations may be overblown.
Many banks still have hundreds of billions of dollars in unrealized losses on Treasuries and mortgage-backed securities purchased when interest rates were extremely low. Because the Federal Reserve has raised rates sharply to reduce inflation, some of those bond investments are now very scarce.
Christopher Whalen of Whalen Global Advisors said some of the problems at banks like First Republic were fueled by the Fed’s easy monetary policy, which led to the loading of now-underperforming bonds. “This problem will not go away until the Federal Reserve lowers interest rates,” he said. “Otherwise, we’ll see more banks fail.”
But Mr Whelan’s opinion is a minority opinion. In Silicon Valley, there is a growing consensus that the failures of Signature and now First Republic will not trigger a repeat of the 2008 financial crisis that brought down Bear Stearns, Lehman Brothers and Washington Mutual.
The three banks that failed this year had more assets than the 25 that failed in 2008 after adjusting for inflation. But still A total of 465 banks failed between 2008 and 2012.
An unresolved issue is how to deal with banks that have a high percentage of uninsured deposits — deposits from customers that exceed the $250,000 federally insured limit. The FDIC on Monday recommended that Congress consider expanding its ability to protect deposits.
Many investors and depositors have already assumed that the government will step in to protect all deposits in failed firms through a formal risk waiver they have already struck with Silicon Valley Bank and Signature Bank. But that is easier to do when a few banks are in trouble and more difficult when many banks are in trouble.
Another concern is that mid-sized banks will pull back on lending to preserve capital if they undergo bank runs like those at Silicon Valley Bank and First Republic. Depositors can transfer their savings to money market funds, which can provide higher returns than savings or checking accounts.
Central banks, which criticized themselves last week in reports on bank failures in March, should prepare for more rigorous oversight from central banks and the FDIC.
Regional and community banks are an important source of financing for the commercial real estate industry, which includes office buildings, apartment complexes and shopping centers. Banks’ reluctance to lend to developers can hold back plans for new construction.
Any slowdown in credit delivery could lead to a slowdown or slowdown in economic growth.
Despite challenges and concerns about big banks getting bigger, some experts said regulators have done an admirable job of restoring stability to the financial system.
“It was a very difficult situation, and as difficult as it was, I think it worked out well,” said Sheila Beyer, who chaired the FDIC during the 2008 financial crisis.
Reporting contributed Emily Flitter, Alan Rapport, Rob Copeland And Gina Smialek.
