JPMorgan's purchase of failed bank renews debate over 'too big to fail'

WASHINGTON (TND) — The collapse of a third bank in less than two months and the purchase of it by America’s largest bank has renewed the debate over some financial institutions holding too much power within the financial system and becoming “too big to fail.”

First Republic was seized by federal regulators over the weekend and sold to JPMorgan Chase before markets opened Monday morning as the government again tried to soothe concerns about further troubles in the banking sector after Silicon Valley Bank and Signature Bank went under earlier this year.

It was the second-biggest bank failure in U.S. history, behind only Washington Mutual, which collapsed during the 2008 financial crisis and was also taken over by JPMorgan.

First Republic had struggled with losing deposits since the first two bank failures. After they collapsed, clients started to pull their money out of First Republic quickly to protect themselves from another bank run like the one that doomed SVB.

A whirlwind weekend of talks with private institutions led to JPMorgan’s acquisition of First Republic. The bank said the purchase will increase its profits by $500 million this year.

“Our government invited us and others to step up, and we did,” JPMorgan CEO and chairman Jamie Dimon said in a statement Monday.

But the sale of a large bank, the 14th-largest among commercial banks by the Federal Reserve’s rankings, to the biggest bank in JPMorgan Chase has also raised issues from some lawmakers.

“The failure of First Republic Bank shows how deregulation has made the too big to fail problem even worse. A poorly supervised bank was snapped up by an even bigger bank—ultimately taxpayers will be on the hook. Congress needs to make major reforms to fix a broken banking system,” said Sen. Elizabeth Warren, D-Mass.

Institutions like JPMorgan that people consider “too big to fail” have benefited from the banking crisis this year and dating back to the 2008 financial crisis. This year, officials have watched for a rush of deposits to some of the largest banks from small and regional ones and the sale of First Republic is bringing an influx of profits.

In 2008, JPMorgan and others were able to absorb several former competitors that collapsed during the crisis and consolidate power in the financial system. JPMorgan would not have been allowed to buy First Republic by law because no single bank can account for more than 10% of deposits in the U.S. but was allowed to move forward because it collapsed.

Financial experts say that brings on risks for the American economy.

“In allowing banks to grow and become ‘too big to fail,’ unchecked, we are allowing Lehman Brothers risk to remain in the system,” said Mark Williams, a finance lecturer at Boston University’s Questrom School of Business and former bank examiner at the Federal Reserve Bank. “This risk can only be mitigated by breaking up the largest banks or by accepting their large status and strengthening regulation and supervision over such banks.”

The fallout from the bank failures has sparked talks between lawmakers and calls from some federal regulators to enhance regulatory scrutiny over the banking system. Much of those discussions have been focused on banks that do not surpass the existing threshold of $250 billion in holdings, but legislation could affect the country’s largest institutions as well.

Regulators are facing their own scrutiny from Congress after a series of government reports were released over the last week examining the failures in regulatory oversight that helped lead to collapses. Allowing JPMorgan to acquire the 14th-largest bank could also become an issue in talks of new regulations.

One aspect that is already being discussed is whether to increase the Federal Deposit Insurance Corporation’s cap on deposits from $250,000. The cap was increased to $250,000 from $100,000 as part of the fallout of the 2008 financial crisis, and has been a subject of debate again after all deposits at the failed institutions were guaranteed regardless of if they went over the cap.

In the short term, the guaranteed deposits help calm markets and consumers to stave off contagion from working its way through the system and leading to more bank runs. But experts say it can also lead to more risky behavior by banks.

“The bigger banks including SVB, Signature and First Republic Bank played by different rules, relying almost entirely on non-insured FDIC depositors to fund their lending and security purchasing operations,” Williams said. “Their overreliance on ‘hot money’ deposits combined with exposure to interest rate sensitive securities and poor risk management was their undoing. Going forward, regulators need to closely exam banks that attempt to apply similar risky banking behavior to prevent such blowups in the future.”

First Republic had high levels of deposits above the federally insured threshold of $250,000 and grew very quickly thanks in part to a wealthy client list who made huge deposits.

Lawmakers in both parties have either called for lifting the limit again or said they would be open to examining it as a possible remedy, but no legislation has moved through Congress addressing it yet.

“Every time the government increases this limit, they increase moral hazard, the risk to taxpayers, and the greater banking system,” Williams said. “The higher FDIC limits only inject higher moral hazard into the banking system and undermines the discipline of those that take risk and seek reward.”