Consolidation in US Baking Sector Continue Unabated Since Last Four Decades

JPMorgan’s takeover of First Republic Bank, following the collapse of Silicon Valley Bank and Signature Bank, the two mid-sized lenders, is a clear indication of the consolidation process in the US banking system, which was happening due to these banks’ high exposure to various sectors. 

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When JPMorgan Chase announced that it has won the bid to acquire the troubled First Republic Bank a week ago, it was nothing but part of the ongoing consolidation of the US Banks in the last four decades.

According to the Federal Deposit Insurance Corporation (FDIC), an independent agency created by US Congress to maintain stability and public confidence in the nation’s financial system, the number of banks has declined considerably in the last 40 years. 

While there were 14,469 commercial banks in 1983, their numbers shrank drastically to 4,135 by the end of December last year. Those remaining banks operated 71,190 branches at the end of 2022, up from just over 40,000 in 1983, the FDIC said.

JPMorgan’s takeover is a clear indication of the consolidation process in the banking system in the US, which was happening due to these banks’ high exposure to various sectors. 

Some of the nation’s largest banks joined hands in a rescue attempt to help First Republic Bank in mid-March by placing $30 billion in uninsured deposits but alarmed customers withdrew their hard-earned money in no time. Depositors withdrew over $100 billion from the bank in March alone.

In its Q1-2023 financial results, the First Republic Bank, said that it ended the quarter with $74.4 billion in total deposits, down from $173.5 billion on March 9, the day before Silicon Valley Bank’s failure.

JPMorgan Chase Chairman Jamie Dimon, while announcing the deal, said that the US government invited JPMorgan and other banks to step up, and they obliged.

As per the agreement, JPMorgan will take-over $92 billion of deposits, including $30 billion in deposits from large banks including itself, that were part of a failed rescue attempt in mid-March and will be repaid or eliminated once the deal is completed.

JPMorgan is the largest bank in the US with over $2 trillion in domestic deposits at the end of 2022. Its share of total deposits in the US banking system is well above 10%. Though the US Federal Law does not allow any bank from further acquisitions if its share of total deposits is more than 10%, there is a provision when the bank being acquired is sinking.

Deal Draws Criticism

The acquisition, however, has drawn sharp criticism. Dennis M. Kelleher, President and CEO of Better Markets, a non-profit promoting financial market reform, called the auction process “time-pressured, panicky-looking, and biased.”

“While the regulators appear to have followed the law in seizing First Republic Bank by selling most of it to JPMorgan Chase, this process nonetheless again highlights fundamental failures in our banking, legal, and regulatory systems. The current ad hoc, over-the-weekend auction process damages public confidence and is a disservice to the country,” he said.

Applying these banking bandaids in the middle of a panic guarantees such lurching from crisis to crisis will continue and get even worse and this must change, he added.

“First, while required by law, the ‘least cost option’ is too narrowly focused on dollars and cents and not broadly on the health and stability of the banking system and economy. The current process is biased because it favours the biggest, most sophisticated banks, which results in unhealthy consolidation, unfair competition, a dangerous increase in too-big-to-fail banks, all while harming community banks, small business lending, and economic growth,” he said.

“Second, penalties for reckless and irresponsible bank executives are clearly inadequate to deter such conduct and prevent such failures in the first place. Numerous measures must be taken, but first and foremost must be the requirement that all executive compensation for not less than the prior five years be clawed back and executives should be barred from the financial industry for life. That must be the baseline penalty when a bank fails under such circumstances,” he said.

“Third, this bankruptcy again illustrates the total failure of the resolution process required by the 2010 Dodd-Frank law. Known as living wills, it is years past time that regulators force banks to have resolution plans that will work when a bank fails. After the collapses of Silicon Valley Bank and Signature Bank, this latest bank seizure and sale makes clear that regulators have utterly failed to implement the Dodd-Frank law as written, designed and intended,” he said.