JPMorgan Chase's acquisition of First Republic further consolidates the industry in the country's largest bank, says the University of Michigan's Erik Gordon. Johannes Eisele/AFP via Getty Images
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First Republic Bank is no more. The embattled financial institution was shuttered by federal regulators overnight Monday and sold to America’s largest bank, JPMorgan Chase, in a multi-billion dollar deal to secure depositors’ money and most of First Republic’s assets.
The operation, which involved the Federal Deposit Insurance Corporation and other regulators, now raises questions about what the second-largest bank failure in U.S. history will mean for the financial industry. According to the University of Michigan’s Erik Gordon, JPMorgan’s acquisition of First Republic means further consolidation in a banking sector that has already been marked by the dominance of “too-big-to-fail” institutions.
“JPMorgan Chase is now too big to be ‘too-big-to-fail,'” Gordon said in an interview with Marketplace’s David Brancaccio. “[The] current administration doesn’t like big — they’re going after big. In fact, this deal makes JPMorgan so big that it needs approval from the OCC, the Office of the Comptroller of the Currency, to even go through.”
The following is an edited transcript of their conversation.
David Brancaccio: First of all, very important, those who kept deposits of any size in First Republic and hadn’t taken them out in the last few weeks — their money is now over at JPMorgan, the biggest bank. Rest easy, your money’s over there.
Erik Gordon: Yeah, no problem. And in fact, you can go to your Republic bank branch, which as of this morning will be a JPMorgan Chase branch.
Brancaccio: Nice of JPMorgan to step in here. The CEO says the government asked, and they did. They’re aware that a bunch of money is coming its way to help with this, with the costs, from the Federal Deposit Insurance Corporation, right?
Gordon: Yeah, they’re going to get a backstop on losses, a $50 billion loan to do the deal. And they expect to recognize a one-time gain of $2.6 billion. So it’s not entirely a matter of civic duty.
Brancaccio: And so will people now conclude it’s good to have huge, too-big-to-fail banks around to help when the going gets tough?
Gordon: Yeah, I mean, JPMorgan Chase is now too big to be “too-big-to-fail”. And, you know, it runs against current government policy. [The] current administration doesn’t like big, they’re going after big. They say, you know, these institutions are already too big. In fact, this deal makes JPMorgan so big that it needs approval from the OCC, the Office of the Comptroller of the Currency, to even go through.
Brancaccio: Now. We’re talking about bank regulation. We heard from both the Federal Reserve and the Federal Deposit Insurance Corporation last week, criticizing themselves for not doing enough to supervise the two other banks that failed seven weeks ago. Here we are again, right. So, are they going to beef that up?
Gordon: They need to make some changes. I mean, it seems to be systemic. The regulators, the people that we rely on to oversee these banks, don’t seem to see very much.
Brancaccio: Let’s talk about causes for a second here. First Republic customers, with texts and headlines on their smartphones, started saying, “I’m pulling out my money. What about you?” And so all these deposits fled, but also something else right? First Republic was also on the wrong side of one of the great challenges of our time, right? Interest rates are rising and what should have been safe holdings of government bonds weren’t so safe if you need the money in a hurry.
Gordon: First Republic not only had safe government bonds, but it had a lot of really jumbo real estate loans. Because remember, its clients tend to be really wealthy people. So they have these big real estate loans. And the bank made a fatal choice — instead of making the loans and reselling them to other investors, like most banks do, First Republic held on to those loans. And just like the government securities, their value plummeted.
Brancaccio: Now, Erik, if we step back from the story a bit, banks are supposed to be solid, safe granite-like protectors of our money. I mean, they have big columns out front that look very safe. How do we let them get risky like this?
Gordon: You know, we’ve let banks go from being those safe bedrock institutions to being sort of speculators. They’re sort of speculating on interest rates. They’re using a lot of leverage. They’re really maximizing profits, not safety. And you wonder whether they have wandered from their essential purpose and need to be reined in some way.
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Now, let's delve into the concepts mentioned in the provided article:
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JPMorgan Chase's Acquisition of First Republic:
- This event represents a significant development in the financial industry, marking the acquisition of First Republic Bank by JPMorgan Chase.
- The acquisition was prompted by the closure of First Republic Bank by federal regulators, leading to a multi-billion dollar deal with JPMorgan Chase to safeguard depositors' funds and acquire most of First Republic's assets.
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Consolidation in the Banking Sector:
- According to Erik Gordon from the University of Michigan, JPMorgan's acquisition of First Republic contributes to the ongoing consolidation trend in the banking sector.
- The financial industry has already been characterized by the dominance of "too-big-to-fail" institutions, and this acquisition further solidifies JPMorgan's position.
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Regulatory Approval and Oversight:
- JPMorgan Chase's increased size due to the acquisition raises concerns about being "too-big-to-fail," necessitating approval from the Office of the Comptroller of the Currency (OCC).
- The regulatory landscape and government policies play a crucial role in overseeing and approving such large-scale transactions.
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Financial Stability and Government Intervention:
- The government's involvement in this acquisition is notable, with JPMorgan Chase stepping in at the request of the government.
- JPMorgan is set to receive support from the Federal Deposit Insurance Corporation (FDIC), including a $50 billion loan to cover potential losses.
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Public Perception and Confidence:
- The article addresses the impact on depositors, reassuring them that their funds are now with JPMorgan Chase, the largest bank in the country.
- It reflects on the broader question of whether having large, "too-big-to-fail" banks is considered beneficial during challenging economic times.
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Banking Crisis and Regulatory Response:
- The article references the recent banking failures and the criticism faced by regulatory bodies such as the Federal Reserve and FDIC for not adequately supervising the failed banks.
- There is a call for regulatory changes to address systemic issues and enhance oversight of financial institutions.
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Causes of First Republic's Failure:
- First Republic faced a significant outflow of deposits as customers withdrew their funds in response to negative developments.
- The bank's exposure to rising interest rates and its holding of jumbo real estate loans are identified as contributing factors to its downfall.
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Banking Practices and Risk Management:
- The discussion touches upon how banks have evolved from being perceived as safe, bedrock institutions to engaging in riskier practices, including speculation on interest rates and leveraging for profit maximization.
- There is a suggestion that banks might need to reevaluate their essential purpose and adopt measures to enhance safety over profit.
In summary, the article covers a range of topics, including the JPMorgan Chase acquisition, banking consolidation, regulatory challenges, government intervention, public confidence, and the need for reforms in banking practices and oversight.
