WASHINGTON — First Republic Bank's failure early Monday morning capped more than a month of speculation and touch-and-go scenarios for the bank — probably not the orderly resolution the bank previously promised regulators as it lobbied for weaker oversight requirements.
As regulators consider how to adjust policy in the aftermath of several large regional bank failures, toughening resolution requirements could be an easy win for the Biden administration.
It has the advantage of
The executives of several of the failed banks had, in the past, argued against these requirements, including the chief executive of the most recently felled institution, Mike Roffler of First Republic. Earlier this year, Roffler told the Federal Reserve and the FDIC that he expected the bank could be resolved without extra oversight or government requirements.
"In the event of failure, it is expected that the bank could be resolved in an orderly fashion in accordance with its resolution plan," Roffler wrote in a
But some policy watchers have pointed out that First Republic's failure — while it didn't force regulators to use the same systemic risk exception that they deployed in the failures of Silicon Valley Bank and Signature Bank — still wasn't exactly "orderly," or at least not according to
"It's not orderly anytime you've got depositors withdrawing their money at such a rapid pace that it forces the FDIC and regulators to take that kind of action," said John Bovenzi, co-founder of The Bovenzi Group and a former FDIC official, of the First Republic failure.
Todd Phillips, principal of Phillips Policy Consulting, LLC and a fellow at the Roosevelt Institute, said that the sale to a large bank like JPMorgan Chase shows that First Republic's resolution plan, and the web of laws put in place after the last financial crisis meant to limit the power and size of the largest U.S. banks, weren't as effective as regulators would have hoped.
"I'm sure that First Republic's submitted resolution plan did not entail them getting sold to JPMorgan," he said. "The resolution plan didn't work."
Bovenzi noted that while the sale of First Republic to JPMorgan wasn't likely regulators' first choice, given the already massive size of JPMorgan, it was one of only a few options available that could absorb First Republic. First Republic also needed the Treasury Department to help obtain additional liquidity for the institution, which it got via a deposit influx from several large banks earlier this year, in order to facilitate the eventual deal.
And although those deposits gave regulators more time to set up a more organized process compared with the Silicon Valley Bank and Signature Bank failures, that still doesn't mean that First Republic was able to be wound down according to its resolution plan.
"That slowed things down enough where they could resolve the bank with a bidding process and give the other banks enough information to bid on and not feel as rushed as they did in other transactions," Bovenzi said. "So it wasn't ideal, but it was more orderly than the other situations."
First Republic
First Republic's failure — and what it signals to both financial markets and Washington policymakers — is an open question, and not one with any easy answers, particularly compared with Silicon Valley Bank and Signature Bank.
Although First Republic did require a little extra attention from regulators, the sale was still a "win-win" for the FDIC and for JPMorgan, said Vern McKinley, a financial regulation consultant.
For the FDIC, uninsured depositors didn't have to take a haircut, and JPMorgan's bid allowed a lower hit to the Deposit Insurance Fund than the agency would otherwise expect.
JPMorgan scooped up a larger bank than it would get permission to acquire under other circumstances. The loss-sharing agreement with the FDIC, in which the FDIC will agree to bear 80% of the credit losses on First Republic 's mortgages and commercial losses, means that JPMorgan gets better risk-weighting than if the bank had just bought those loans outright.
"It was a win for JPMorgan, it was also a win for FDIC," McKinley said. "The FDIC is required to run the deal through the least-cost test, and they kept the cost to the lowest of the bids."
Ultimately though, for some policy watchers the sale to JPMorgan alone is enough of a reason for regulators to forge ahead with their plans to bolster resolution requirements.
"We do not want to be in a situation where we have to sell midsized banks to the largest U.S. banks," Phillips said. "But we have found ourselves in that position, and that is unfortunate."
