Tipping the Scales of Opportunity in the Banking Sector

JPMorgan Chase didn’t become the biggest bank in the country by making emotional decisions about their money.

They stepped aside and allowed first Silicon Valley Bank and then Signature Bank to fail earlier this year. Those were not good opportunities. But First Republic bank… that was deemed worth saving. Unlike SVB and Signature, banks that had been poorly run and were fatally flawed, First Republic was the victim of negative momentum, or - as The New York Times originally reported - a “financial contagion.”?

For full coverage of JPMorgan Chase’s rescue of First Republic, listen to this week’s episode of the Dial P for Procurement podcast .

About First Republic

San Francisco-based First Republic bank primarily served high net worth clients, offering them low cost mortgages. About 70 percent of First Republic’s deposits were uninsured, well above the median of 55 percent for banks of comparable size, but their clients were relatively low risk, so it should have been okay.?

When SVB and Signature Bank failed, the contagion quickly reached First Republic, accelerated by social media news and digital banking. Their model collapsed under the weight of rising interest rates and accelerating withdrawals.

First Republic was the third bank to fail this year and the second largest failure in U.S. banking history.

Treasury Secretary Janet Yellen and JPMorgan Chase CEO Jamie Dimon came up with a plan to save First Republic. Eleven of the country’s biggest banks, including JPMorgan Chase, were asked to deposit between $1 and 5 Billion into the bank. It was a workable short term measure, but not a long term solution.

First Republic needed to be acquired. On April 28th, the FDIC took over the bank and announced their intent to find a buyer. Procurement professionals will be interested to hear that they auctioned off the bank.

The First Republic Auction

There were four bidders in the auction to buy First Republic: PNC, Citizens Bank, Fifth Third, and JPMorgan Chase (who relinquished their role as First Republic’s advisor in order to participate). It was a long process with multiple rounds of clarification and feedback that ended at 1am on Monday, May 1st.?

Under a 1992 law, the FDIC is required to choose the bid that is the least expensive to them. Unfortunately, ‘participants say ’ the FDIC found it difficult to compare the complicated bids. And that wasn’t the only challenge.?

The FDIC didn’t offer each of the bidders the same deal. PNC, a regional bank backed by a group of asset managers, wasn’t offered government financing or loss-share agreements like JPMorgan Chase. If they had been, their bid might have been more competitive.?

In an uneven situation, JPMorgan Chase won the auction because their bid was simpler (or at least easier to understand) and cheaper. As is so often the case, the bidder who best understood the rules and the decision criteria was able to win the auction. Was it also the best solution for First Republic bank? Time will tell…

Flashback: 2008-2009?

As I’ve mentioned, First Republic was the second largest bank failure in U.S. history.?

The largest was the 2008 failure of Washington Mutual – which was also seized by the Federal government and sold to JP Morgan Chase. It was worth more than $327 Billion when it failed. That was part of a series of events that led to the international banking crisis and Great Recession. Washington Mutual ended up being far more costly and legally complex to acquire than JPMorgan Chase expected, and yet Jamie Dimon saw it through.

Dimon is considered to be a master at integrating strategically selected acquisitions. JPMorgan Chase has around $4 Trillion in assets and 250,000 employees. They have been on a buying spree since 2021, acquiring more than 30 companies in deals worth over $5 Billion. But then they hit a regulatory ceiling that looked like it was going to bring that growth spurt to an end.

The 1994 Riegle-Neal Interstate Banking and Branching Efficiency Act prohibits banks that hold over 10 percent of national deposits from making additional acquisitions without a waiver from Federal banking regulators. Only JPMorgan Chase and Bank of America are currently capped by this regulation.

Because JPMorgan Chase controls more than 10 percent of U.S. deposits, it is barred from buying other banks… EXCEPT in emergency situations. That makes it hard to grow in good times, but creates big opportunities in tough times.

According to the Financial Times , JP Morgan Chase currently holds just shy of 15 percent of U.S. deposits… beyond the 10 percent ceiling. They were only able to acquire First Republic with a waiver from the Federal government. Banking emergencies are the only way they can make more acquisitions. It gives a new perspective to the phrase “too big to fail.”

Putting the Deal into Context

The FDIC gave JPMorgan Chase a waiver, allowing them to buy First Republic because it was in the nation’s best interests to “stop the contagion.” Rules are made to be broken - especially in service of the greater good, right?

Well… maybe not.

TD Bank and First Horizon are regional banks that wanted to merge. Doing so would have allowed them to diversify their holdings and compete with the big guys - like JPMorgan Chase. The FDIC made the process of requesting and receiving approval so painful, that on May 4th - just 3 days after the auction for First Republic bank - TD Bank and First Horizon called off the deal. But JPMorgan Chase was allowed to go from 13 to 15 percent of U.S. deposits.

Aren’t consumers and institutions better served when there is more competition? Typically, but apparently that wasn’t enough for the FDIC to support the consolidation of two healthy regional banks.

My key takeaways from these events are:

• The trade-offs between stability and competition in any market need to be faced head on, especially when regulators are waiving their own rules and potentially putting their finger on the scale at the same time. Did the FDIC do the right thing by waiving the rules that would have prevented JP Morgan from buying First Republic? Should PNC have gotten the same terms as the other bidders?
• From JP Morgan Chase’s perspective, it is critical to be good at picking winners and losers. First Republic was worth saving, while Silicon Valley Bank and Signature bank were not. It is true that you can go broke on good deals, and Jamie Dimon learned his lesson on Washington Mutual.
• High and climbing interest rates continue to create challenges for people, businesses, and industries. They played a role in 2008 and again this year. Will there be another interest rate hike in June? Maybe not, but we’ll have to wait to find out for sure. In the meantime, businesses of all types should be looking at the interest rate-based assumptions in their business model and making changes before the market makes it for them.?

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