JPMorgan Chase acquires First Republic Bank; Is this a path to more consolidation in the industry?

On Sunday, the Federal Deposit Insurance Corporation sold First Republic Bank to JPMorgan Chase in a quick sale to prevent the bank from a collapse. This come following the recent collapse of Silicon Valley Bank (SVB) and Signature Bank, where depositors pursued a "run" on the banks, which had underlying risk management issues.

Despite the big banks giving $30 billion to First Republic at the request of the FDIC, First Republic Bank disclosed that customers have withdrawn over $100 billion in deposits since March. This plunged their stocks further and FDIC requested a few banks to submit proposal to acquire them before markets open on Monday. JPMorgan Chase, Bank of America, and PNC submitted proposals. FDIC chose JPMorgan as they were in the best position to take on First Republic where the FDIC would not have to contribute too much from their insurance deposit fund. First Republic is considered the 2nd largest bank to collapsed in the US with assets of over $229 billion behind Washington Mutual, who collapsed in 2008 with $307 billion.

Concerns with First Republic/JPMorgan acquisition

With this acquisition, JPMorgan further catapults itself as the largest bank in the U.S. by deposits. This deal will add another 3% unto its existing 16% ($2.4 billion) of all U.S. deposits. Current federal laws states that banks having over 10% of U.S. deposits are prohibited from acquiring or merging with any bank. Currently, JPMorgan, Bank of America, Citibank and Wells Fargo holds 45% ($5.5 billion) of all U.S. deposits and over 40% ($1.9 trillion) is U.S. banking assets.

Many have called into question this exception to the rule, citing the government's relationship with JPMorgan Chase and a potential move towards a more consolidated banking sector, with the big banks having full control. Diversity in banking is not only good for the economy, but helps spread bank risks and allow people to do business with ease. Large banks, though more established, tend to have longer approval time and more extensive requirements for those opening accounts and/or seeking business loans, mortgages etc.

Washington Mutual was a regional bank that failed and had to be acquired by JPMorgan Chase at the request of the government. This was followed by the acquisition of Bear Sterns, an investment bank, and now First Republic Bank. This pattern of acquisitions might play into the hands of critics who feel that the FDIC is not assisting smaller banks to maintain competition, but instead are furthering the consolidation of the industry to a very few banks in the future, which more governmental control.

History of bank mergers & consolidation in the U.S.

Banks being merged or consolidated in the event of failure is nothing new. Mergers have both been done for economic and expansion reasons as early as the 1900s on a small scale. They then became more frequent following the Great Depression of 1929, where bank runs were prevalent and led to the collapse of the U.S. banking system.

The FDIC was then created in 1933 with new legislations that would insure up to $2,500 in deposits for state and national banks starting in 1934. The government then passed the Banking Act of 1933, which gave the FDIC the power to oversee the banking industry, regulate non-member banks, allow national banks to branch out in their state, and forced commercial and investment banks to operate separately. Following this establishment, a series of banking acts and laws were passed to not only prevent future bank runs, but to facilitate a more regulated banking system, allow for mergers, and to incorporate financial solutions that impact society i.e. credit and loans for housing, real estate, car etc.

Furthermore, laws have been changed to allow banks to merge and acquire others in instances where they could not. One such case was a law that initially made it illegal for out-of-state banks to acquire in-state banks. When this law changed in Texas and New York, Texas Commerce Bank was then acquired by Chemical Banking Corporation, based in NYC for $1.2 billion. Chemical Banking Corporation became todays's JP Morgan Chase, after acquiring Chase Manhattan Bank.

The road ahead....

Following the deal announcement of JPMorgan Chase and First Republic Bank, the share price of many regional banks plunged, causing more concerns for the ongoing bank crisis. Regional banks such as PackWest Bank, Western Alliance, and First Horizon are feeling the effect of the crisis initiated with SVB back in March. Reports have surface that PacWest is looking to pursue potential sale of a part or the entirety of its business amidst a banking failure possibility.

Even though these regional banks have reassured their customers and investors that they will not be another First Republic Bank, the pattern of regional banks failing is not giving investors confidence in the bank's survival. With more regional banks feeling the effects of this deal and JPMorgan Chase further catapulting itself as the leading bank, what action will other big banks and the FDIC take to reassure confidence and competition in the system?

Some questions and concerns coming out of this acquisition and regional banks crisis are:

• Would this deal persuade other big banks to demand an opportunity to acquire regional banks under "special circumstances" or if failed, given that JPMorgan Chase's lead in deposits is partly due to these type of acquisitions?

• Will the FDIC increase the 10% U.S. deposit merger threshold and enforce this rule under all circumstances to further prevent big banks from dominating the industry?

• Will the FDIC enact policy to provide alternative methods to support failing banks that does not involved being acquired by a leading bank? i.e. PNC, which does not have over 10% of U.S. banking deposits, did submit a proposal to acquire First Republic Bank

Overall, it's evident that many are concern about the future of the banking system in the US and the ability of the government to solve the current crisis, and prevent big banks from further dominating the industry.