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'Too Big To Fail' Rears Its Head Again

S. J. Steinhardt
Published Date:
May 2, 2023

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JPMorgan Chase’s purchase of the failing First Republic Bank is reviving the specter of “too big to fail” that haunted the 2008-09 financial crisis, The Washington Post reported. The bank is the largest in the United States; as of February, it owned 16 percent of the nation’s deposits, according to WalletHub.

Federal law normally prohibits institutions that control more than 10 percent of the nation’s deposits from acquiring other banks, a restriction that does not apply when the target is failing. Chase, already the nation’s biggest bank with more than $3.2 trillion in assets, added an additional $200 billion in loans and securities by acquiring First Republic. As of April 13, First Republic had roughhly $103.9 billion in total deposits and $229.1 billion in total assets, according to a press release by the Federal Deposit Insurance Corporation (FDIC). Its 84 branches in eight states are now Chase branches.

“Our government invited us and others to step up, and we did,” JPMorgan Chairman and CEO Jamie Dimon said in a widely-reported statement.

The bank has stepped up before. It purchased the collapsing Washington Mutual Bank and investment bank Bear Stearns in 2008, deals that Dimon later regretted, according to Fortune.

Sen. Elizabeth Warren (D-Mass.) objected to the recent acquisition. “The failure of First Republic Bank shows how deregulation has made the too big to fail problem even worse,” she tweeted, referring to 2018 legislation that rolled back certain provisions of the Dodd-Frank Act. “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.”

One observer lamented the lack of action on that front. “Regulators have had years to ensure that banks like First Republic and Silicon Valley Bank have living wills that enable them to be resolved in bankruptcy like any other company in America that fails, and they have not done their job,” Dennis Kelleher, president of the nonprofit group Better Markets, told the Post.

The 2018 law required all banks with more than $50 billion in assets to file a “resolution plan” with the Federal Deposit Insurance Corporations (FDIC) to provide insight into how the institution could be wound down if it were to fail. In December, First Republic Bank stated that it believed “that a resolution of the Bank by the FDIC would not require the use of any extraordinary government support and would substantially mitigate the risk that the failure of the Bank could have a serious adverse impact on the financial stability of the United States.”

First Republic’s failure is expected to cost the FDIC about $13 billion, the agency said.

“Thirteen years after Congress told them to prepare to resolve these banks, they still couldn’t do it to two medium-sized, non-complex banking organizations, and now here’s a third,” Karen Petrou, managing partner of Federal Financial Analytics, a Washington consultancy, told the Post “This is a very high-cost resolution.”

Jeremy Barnum, JPMorgan’s chief financial officer told reporters that the bank “did not seek out this deal” but was approached by federal regulators about bidding on First Republic’s assets.

Last week, the FDIC issued the results of a review of its supervision of Signature Bank, in which it admitted that it could have escalated supervisory actions sooner.