JPMorgan may be the banking sector’s biggest hero — or biggest risk

New York (CNN) JPMorgan Chase, the largest bank in the US, is growing even bigger. As the size of the bank swells, so does the potential risk it poses to the country’s financial system.

The Federal Deposit Insurance Corporation said early Monday that c. B. Morgan Chase (JPM) He bought most of First Republic’s assets after the regional bank collapsed, spurred by a sharp drop in its shares after a quarterly earnings report revealed $100 billion in deposit outflows in the first quarter.

Some experts say they are concerned that JPMorgan’s continued intervention in times of crisis has broader ramifications for the banking sector and the US financial system and its regulation.

JPMorgan has a staggering $3.67 trillion in assets, not even its latest acquisition. The bank’s sheer size means that it is often seen as an economic pioneer and a “too big to fail” entity.

The bank has earned a reputation as the first line of support during a crisis for its history of interventions. When Bear Stearns collapsed in 2008, JPMorgan stepped in to buy it out. Six months later, when Washington Mutual collapsed in the largest American bank failure ever, the Jamie Dimon-led lender took over its banking assets.

Critics question whether the bank is playing a quasi-public role that gives way to a growing number of stakeholders.

“It used to be, but now it’s much clearer, that whatever strategic business decisions JPMorgan makes on its own for its own business, they will fundamentally shape the direction of the entire banking and financial sector in the United States,” said Saul Omarova, a law professor at Cornell University. .

And with each failed bank JPMorgan executes, the conundrum becomes clearer: JPMorgan is essentially the biggest risk to the financial system — and every time it expands to keep the sector stable, so does its risk to the financial system.

A gift from God

While First Republic’s deposits are modest compared to JPMorgan’s, its acquisition still has notable benefits to JPMorgan’s already huge balance sheet.

The bank expects to spend $2 billion on restructuring until the end of next year. But it also expects a more than $500 million increase in its net income annually from the acquisitionAnd Plus a one-time gain of $2.6 billion.

Under the deal, JPMorgan will not assume First Republic’s debt and will receive $50 billion in financing from the FDIC. The bank will pay First Republic $10.6 billion, return $25 billion in money deposited by other large lenders as a lifeline in March, and cancel its $5 billion deposit.

“This is a gift from God to JPMorgan,” said Dick Bove, chief financial strategist at Odeon Capital Group.

JPMorgan is also preparing to turn some First Republic subsidiaries around the country into its own wealth centers and inherit the beleaguered lender’s affluent clients, potentially taking market share from smaller, already struggling lenders.

As its market share expands, so does its position as a formidable competitor.

Umarova said he has “that ability again, to signal to the world that JPMorgan is a fortress, JPMorgan is the best. That’s where the official stops when you want to solve the problem – it’s JPMorgan or nothing.” “This is worrying.”

Undermining trust

While JPMorgan emerges as a savior in the deal, federal regulators are less impressive. Some experts worry that the bank’s history of coming to the aid of the US financial system breeds mistrust of regulators.

The FDIC tends to “run to where the money is and ask for help,” Boff said. “If you’re on the JPMorgan side or the Bank of America side or the Morgan Stanley side, you can sit there and craft the deal that benefits you the most.”

However, the alternative to big banks getting involved isn’t necessarily better for the financial sector or the economy, said Nicholas Fearon, a senior fellow at the Peterson Institute for International Economics.

While there are other options, such as the United States owning a failed lender or liquidating all of the bank’s assets, these solutions contain political and financial risks that pose serious and more immediate threats to the stability of the financial system.

“In practice, it is very difficult to dissolve a large bank without looking for another bank to take over its business,” Fearon said. “Nobody really wants to be the first to try it.”

What’s the solution?

The United States has laws in place to stop these crises before they happen. But recent failures, and the missteps they have led to, point to deep flaws in the financial system.

“It’s a twofold problem—the rules could be better. But without better oversight, writing better regulation won’t solve the problem,” said Aaron Klein, senior fellow in economic studies at the Brookings Institution.

After the 2008 financial crisis, the US government enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act in an effort to enhance transparency and accountability in the sector. Global standards have also been introduced, with rules intended to streamline the process of liquidating major banks without destabilizing the financial system or burdening taxpayers.

At the same time, exceptions are made in times of crisis. JPMorgan Chase held more than 10% of the state’s deposits before the First Republic deal, which would normally have prevented it from buying another bank. But this rule gets thrown aside when a failing bank gets involved.

“I think the cap in such deals has always been given away for the sake of order,” Dimon said Monday on a conference call with investors.

In addition, federal oversight was fraught with errors. The Federal Reserve and the FDIC admitted on Friday that they fell short in their regulation of Silicon Valley and Signature Bank before their collapse.

Michael Barr, Fed vice chair of supervision, called for stronger central bank regulation and supervision in a press release accompanying the SVB autopsy.

“While higher regulatory requirements may not have prevented the company’s failure, it is possible that it may have enhanced Silicon Valley’s resilience,” Barr said in the report.

Lawmakers called for tighter rules and oversight after the banking unrest in March, with those calls intensifying after last week. Democratic Sen. Elizabeth Warren, who has been a staunch supporter of tightening banking regulations after recent failures, Congress urged To enact “major reforms to fix the broken banking system”.

“It may look good today while everything is flying high, but in the end if one of those giant banks, JPMorgan Chase, starts to falter, it’s the American taxpayers who are at stake,” Warren told CNN on Tuesday.

“Let somebody else buy that bank,” Warren said, pushing for a more diversified banking system given the First Republic’s many smaller bidders. “Let someone else handle these assets.”

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top