"The executives at First Republic -- who took excessive risks and did not appropriately manage them as interest rates increased throughout 2022 and 2023 -- bear primary responsibility for this failure But the outcome of this seizure and sale were deeply troubling: it resulted in a $13 billion cost to the Federal Deposit Insurance Fund -- which will ultimately be passed on to ordinary bank consumers across the country -- and made JPMorgan, the nation's biggest bank, even bigger. JPMorgan will also record a $2.6 billion gain from the deal.
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Under the law, the FDIC is required to resolve bank failures at the least cost to the insurance fund. But that did not appear to happen here -- instead, the FDIC appeared to prioritize First Republic's uninsured deposits at the bank before the Insurance Fund, while accepting losses to the Fund. The FDIC, with the Federal Reserve and Treasury Department, can avoid taking the least-cost route and guarantee uninsured accounts if it declares a systemic risk exception because of a threat to the financial system. The FDIC used this approach to guarantee depositors for uninsured funds in the aftermath of the failures of Silicon Valley Bank and Signature Bank -- but did not do so for First Republic.
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Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, a bank holding company may not consummate a merger that would result in the bank holding more than 10% of the nation's total deposits -- a standard that JPMorgan already exceeds. However, because Riegle-Neal includes an exception for failed banks, the OCC has indicated that it did not need to take any action because the statute automatically provides a waiver.
The net result of these machinations is that, without a complete regulatory review, and at a cost of $13 billion to the Federal Deposit Insurance Fund, the nation's biggest bank -- already too big to fail -- got a bargain deal on a failing bank that made it even bigger. This is a troubling outcome, leaving me with numerous questions."