December 6, 2023

this Monday morning fail First Republic Bank (the troubled bank was bought by JPMorgan in a government-led deal) had at least two immediate effects:

  • It was the second-largest bank failure in U.S. history, after Washington Mutual’s collapse in 2008. also acquired JPMorgan. Three of the Big Four U.S. banks have failed in the past two months, with Silicon Valley Bank and Signature Bank, which collapsed in March, joining the list.
  • JPMorgan Chase, already the largest bank in the United States, just got bigger. According to news reports, JPMorgan, led by Jamie Dimon, secured $173 billion in First Republic loans, $30 billion in securities and $92 billion in deposits. end of 2022JPMorgan Chase has $2.34 trillion in deposits.

From JPMorgan’s and the government’s perspective, the move also averted a larger crisis. With the First Republic faltering in recent weeks and private sector efforts to prop up its balance sheet ineffective, customers have been withdrawing deposits. When it stepped in, JPMorgan offered to take over the entire bank, minimizing the impact on FDIC insurance funds. The agency expects losses of about $13 billion.

Dimon said in a conference call with reporters that the move would help stem the tide of bank failures.

“It’s coming to a close and hopefully this helps to stabilize things,” he said, noting “good results” from regional banks in the first-quarter numbers. “The U.S. banking system is very sound.”

How the First Republic Failed

The value of San Francisco-based First Republic’s bonds and loans has been squeezed as the Federal Reserve keeps raising interest rates to fight inflation. These assets are bought when interest rates are low. This caused depositors to flee, which took a chunk out of the banks’ capital.

A Dismal first quarter report exacerbated things. A rescue brokered by US regulators that included $30 billion in deposits from a consortium of 11 US banks, including JPMorgan, failed to turn the tide. By the end of April, the bank’s shares were trading at less than $5. Then there’s Monday’s event.

“We should acknowledge that bank failures are inevitable in a dynamic and innovative financial system,” said FDIC Board Member Jonathan McKernan. in a statement issued by the agency. “We should plan for these bank failures by focusing on strong capital requirements and an effective resolution framework, which is our best hope for finally ending our country’s bailout culture that privatizes gains while socializing losses.”

criticism of the move

In some ways, JPMorgan’s idea of ​​a bigger, more powerful iterative isn’t seen as a positive.

Sen. Elizabeth Warren (D-Mass.), a frequent critic of bank consolidation, on twitterwrites, “The failure of First Republic Bank shows how deregulation can make the ‘too big to fail’ problem worse. A poorly regulated bank is bought by a much bigger bank — and ultimately taxpayers will be Locked in. Congress needs major reforms to fix the broken banking system.”

What should we do now?

The hypothesis of the First Republic would be represented by marian lake and Jennifer Pipzak, co-CEO of JPMorgan’s consumer and community banking division, said Dimon. The chief executive added that the First Republic name would not be retained.

As America’s dominant banks continue to grow, it’s getting tougher for regular banks.The first-quarter earnings that Dimon cited and praised also reflected deposits drop This has become a big problem. Low interest rates give savers little reason to move their money, and banks have easy access to funds for loans and purchases of bonds and other securities. Higher interest rates have sent those depositors on the run and prompted banks to boost their spending on products such as savings accounts and certificates of deposit to keep them.