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JPMorgan Chase’s purchase of <a href="https://www.washingtonpost.com/business/2023/04/29/first-republic-bank-fdic/" target=_blank>First Republic Bank</a> is intended to end a budding financial crisis, but it risks doing so by reviving a political battle over the power of the nation’s largest financial institutions.

Already the largest U.S. bank with its more than $3.2 trillion in assets, JPMorgan added an additional $200 billion in loans and securities by acquiring First Republic in a pre-dawn transaction with the Federal Deposit Insurance Corp.

Federal law normally prohibits institutions that control more than 10 percent of the nation’s deposits from acquiring other banks. But that restriction does not apply when the target is failing.

California state regulators closed First Republic early Monday after ruling it was “unsafe or unsound” and named the FDIC to sell off its parts.

JPMorgan’s prominent role in the First Republic saga drew fire from lawmakers such as Sen. Elizabeth Warren (D-Mass.) and highlighted the limits of restructuring implemented in the wake of the 2008 financial crisis. JPMorgan — and other <a href="https://www.washingtonpost.com/us-policy/2023/03/18/big-banks-silicon-valley-bank/" target=_blank>supersized banks</a> — benefited in recent weeks as deposits fled regional lenders for the perceived safety of larger institutions, and now gained again by outbidding others for what was left.

But complaints about the big getting bigger drew a rebuke from Jamie Dimon, JPMorgan’s chief executive. The reality is that only a handful of institutions boast the financial firepower needed to complete a First Republic-sized acquisition.

“We need large, successful banks in the largest and most prosperous economy in the world,” Dimon told reporters Monday. “We have capabilities to help our clients, who happen to be cities, schools, states, hospitals, governments. We bank countries. We bank the [International Monetary Fund]. We bank the World Bank. You need large successful banks. And anyone who thinks it’d be good for the United States of America not to have that should call me directly.”

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The Wall Street firm has a long history of wading into the thick of financial crises and coming out healthier on the other side. The firm’s namesake, famed financier John Pierpont Morgan, helped organize the private-sector rescue that calmed the 1907 financial panic.

A bit more than a century later, under Dimon, JPMorgan purchased a pair of collapsing institutions, Bear Stearns and Washington Mutual, amid a global calamity.

On Monday, after acting again, he proclaimed the current crisis “over.”

But even as he did, shares of PacWest Bancorp, another regional bank that has drawn investor scrutiny, sank nearly 11 percent. The plunge came despite the company’s assurances last week that it was enjoying an influx of deposits.

The growing heft of Wall Street’s biggest institutions, meanwhile, is an uncomfortable issue for the Biden administration. Following the 2008 financial crisis, Democrats enacted legislation aimed at ensuring that complex global banks judged to be “too big to fail” could be wound down without upending the economy.

The largest banks today are safer than they were then, buttressed by larger capital cushions designed to absorb financial losses. But the megabanks continue to enjoy favorable treatment from federal authorities and manage to get ever larger in good times and bad, critics complain.

“The failure of <a href="https://www.washingtonpost.com/business/2023/04/26/first-republic-bank/" target=_blank>First Republic</a> 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,” Warren, a member of the Senate Banking Committee, said in a tweet.

There seems little chance of that, for now.

The failures of three regional banks in seven weeks — <a href="https://www.washingtonpost.com/us-policy/2023/03/10/silicon-valley-bank-failure-financial-industry/" target=_blank>Silicon Valley Bank</a>, Signature Bank and now First Republic — highlight regulators’ failure to require midsize banks to develop adequate “living wills,” or plans to wind down their operations in the event of a failure, according to Dennis Kelleher, president of the nonprofit group Better Markets.

“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,” Kelleher said.

All banks with more than $50 billion in assets are required to file with the FDIC a “resolution plan” designed to provide insight into how the institution could be wound down in the event that it fails.

In its most recent version, submitted at the end of last year, First Republic said that “its focused business model, uncomplicated structure and conservative market share” would make it easy to wind down in a crisis.

“First Republic believes 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,” the bank said in the December document.

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First Republic’s failure is expected to cost the FDIC about $13 billion, the agency said. The money will come from the FDIC’s deposit insurance fund, which insured banks pay into every quarter.

“The taxpayers are not on the hook,” President Biden said in Rose Garden remarks defending the deal.

“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,” said Karen Petrou, managing partner of Federal Financial Analytics, a Washington consultancy. “This is a very high-cost resolution.”

Indeed, the FDIC’s $35.5 billion estimated tab for the three bank failures exceeds the $34.1 billion in insurance premiums that the FDIC collected from the second quarter of 2018 to the end of last year, according to Bert Ely, a banking consultant in Alexandria, Va.

When the FDIC sells a failed bank, it is required to choose the bid that represents the least costly outcome. The largest banks enjoy an advantage in refining their bids to capitalize on the agency’s narrow focus on cost, said Kelleher.

Rep. Ro Khanna (D-Calif.) backed the FDIC’s decision to sell to JPMorgan but expressed reservations about ongoing banking consolidation — there are some 4,700 FDIC-insured institutions, roughly half the total 20 years ago.

Khanna called for raising the $250,000-per-account federal insurance limit to cover all deposits to discourage customers from moving their money from smaller to bigger banks, paired with a fee on large business accounts.

“We should be concerned with the concentration into the top bank,” Khanna said. “In this case, FDIC had no choice but to work with private capital and banks for the lowest cost resolution.”

On Monday, the FDIC released a report mapping out ways deposit insurance could change. When SVB and Signature failed in March, government officials guaranteed all deposits at both banks to avoid a financial panic.

The report described three options: the status quo; unlimited deposit insurance; and what it called a “targeted” approach that would tailor coverage to different types of personal and business accounts. The targeted approach “best meets the objectives of deposit insurance of financial stability and depositor protection relative to its cost,” the agency said.

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Under the deal announced Monday, JPMorgan acquires “substantially all” of First Republic assets and agrees to assume responsibility for all of its deposits, including those above the federal insurance limit of $250,000 per account. JPMorgan is not assuming First Republic’s corporate debt or preferred stock, it said in a statement.

Federal regulators approached JPMorgan about bidding on First Republic’s assets, said Jeremy Barnum, JPMorgan’s chief financial officer. The bank “did not seek out this deal,” he told reporters Monday.

<a href="https://www.washingtonpost.com/us-policy/2023/03/16/yellen-bank-rescue-regional-banks/" target=_blank>In March, </a>JPMorgan led an 11-bank coalition that deposited $30 billion into beleaguered First Republic, as regulators and the industry scrambled to contain a crisis. Barnum said the demise of First Republic did not mean the effort had failed. It bought time “when time was needed,” he said.

Three of the four largest-ever bank failures have happened since March

The closure and sale of First Republic comes seven weeks after the abrupt <a href="https://www.washingtonpost.com/us-policy/2023/03/10/silicon-valley-bank-failure-financial-industry/" target=_blank>failure of Silicon Valley Bank in California</a> prompted an extraordinary <a href="https://www.washingtonpost.com/us-policy/2023/03/13/silicon-valley-bank-doubts/" target=_blank>federal rescue</a> effort aimed at averting a wider financial crisis.

Unlike SVB, which failed in a matter of days, First Republic had been wobbling for weeks. The delay gave regulators and industry executives time to evaluate the bank and prepare for its demise.

FDIC likely to seize wounded First Republic Bank

In recent weeks, the bank hemorrhaged more than $100 billion in deposits. As investors became more sensitive to banking risks, <a href="https://www.washingtonpost.com/business/2023/04/26/first-republic-bank/" target=_blank>shares of First Republic</a> lost 97 percent of their value.

“Normally, regulators don’t react to stock prices. But this one fell so precipitously. It raised public concern and encouraged regulators to act to preserve public confidence,” said John Popeo, a partner at the Gallatin Group financial consultancy and former FDIC attorney.

After the exodus of deposits, the bank became “a zombie institution,” he added.

Like SVB, First Republic blundered into trouble as the Federal Reserve began raising interest rates almost 14 months ago. It invested in long-term assets, such as home mortgages and government securities, when rates were low.

Those now earn the bank a return of about 3 percent, even as it is paying about 5 percent to obtain fresh funds for its operations from the Fed and the Federal Home Loan Bank.

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“Both of them essentially committed financial suicide by putting all these fixed-rate assets on their books and exposing themselves to a rising interest rate environment,” said Ely, the banking consultant.

First Republic’s collapse, like the failure of SVB and Signature Bank of New York, is likely to raise questions about the performance of federal regulators. On Friday, reports from the Fed and the FDIC <a href="https://www.washingtonpost.com/business/2023/04/28/silicon-valley-bank-collapse-investigation/" target=_blank>blamed bank executives</a> in both cases for mismanaging their operations and said federal supervisors had been lax.

Among the attractions for JPMorgan in acquiring First Republic is the failed bank’s wealth management business, with $289.5 billion in assets. That unit, which provides investment services for affluent clients, produced $223 million in fee revenue during the first quarter.

Continued banking upheaval poses a dilemma for the Federal Reserve. The central bank has been raising interest rates for more than a year, aiming to slow the economy and curb inflation. The fight against rising prices is not yet won, but higher rates are causing cracks to appear in the banking system.

Nieman fellowship at Harvard University, 2002

National Press Foundation's Hinrich Award for Distinguished Reporting on Trade, 2021

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Yale University, MA in international relations, 1983

Wesleyan University, BA in government, 1981

David J. Lynch is a staff writer on the financial desk who joined The Washington Post in November 2017 after working for the Financial Times, Bloomberg News and USA Today.

David J. Lynch

New York State Associated Press Young Journalist of the Year

Cornell University, BA in history

Jeff Stein is the White House economics reporter for The Washington Post. He was a crime reporter for the Syracuse Post-Standard and, in 2014, founded the local news nonprofit the Ithaca Voice in Upstate New York. He was also a reporter for Vox.

Jeff Stein

Yale University, BA in History

Rachel Siegel is an economics reporter covering the Federal Reserve. She previously covered breaking news for the Post's financial section and local politics for the Post's Metro desk. Before joining the Post in June 2017, Rachel contributed to The Marshall Project and The Dallas Morning News.