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Elizabeth Warren: 'Very troubled' by First Republic sale to JPMorgan

Senator Elizabeth Warren told US regulators Thursday that she was "very troubled" by the sale of First Republic to JPMorgan Chase (JPM), arguing the deal made the nation's largest lender even bigger and increased risks to the banking system.

“The single biggest threat to the US banking system is concentration," Warren said during a Senate Banking Committee hearing.

She specifically confronted acting Comptroller of the Currency Michael Hsu, among the regulators who awarded the bulk of First Republic's operations to JPMorgan on May 1. That decision followed a weekend-long bidding war overseen by the Federal Deposit Insurance Corporation.

“How do you explain approving a sale to a banking giant that increases the risk to the banking system by somewhere between nearly 800% and 1400% more than selling to other bidders?” Warren said.

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The percentages Warren cited were a reference to an institution's Global Systemically Important Bank (GSIB) score, which estimates the impact a bank would have on the US economy if it were to fail.

According to these scores, Warren said, JPMorgan posed 8 times more risk than PNC (PNC) and 14 times more than Citizens Financial Group (CFG), which were also among the bidders for First Republic.

Sen. Elizabeth Warren, D-Mass., speaks during the Senate Committee on Banking, Housing and Urban Affairs hearing on oversight of the credit reporting agencies at Capitol Hill in Washington, Thursday, April 27, 2023, (AP Photo/Jose Luis Magana)
Sen. Elizabeth Warren said she is "very troubled" by the First Republic sale to JPMorgan. (AP Photo/Jose Luis Magana) (ASSOCIATED PRESS)

The Office of the Comptroller of the Currency, she added, is required to consider concentration of power when assessing whether an acquisition might pose risks to stability of the US banking system.

"According to your own metric you chose the one that gives us more concentration in the system," Warren said. "I am very troubled by that decision."

Hsu said there were other factors regulators had to consider while evaluating bids for First Republic, which was previously the nation's 14th largest bank.

The government had to act quickly to find a buyer over one critical weekend, and it had to minimize losses to the FDIC's Deposit Insurance Fund, which is used to cover losses associated with bank failures. The seizure of First Republic is estimated to cost the FDIC $13 billion.

“Had we followed a strict GSIB score methodology to the exclusion of everything else, I fear that there would have been greater financial instability that weekend,” Hsu said.

JPMorgan Chase CEO Jamie Dimon has forcefully rejected any concerns about the nation’s biggest bank getting even bigger as a result of this deal.

"We need large successful banks in the largest and most prosperous economy in the world," he said the day the First Republic deal was announced. "For anyone who thinks that the United States of America should not have that should call me directly."

UNITED STATES - SEPTEMBER 22: Jamie Dimon, CEO of JPMorgan Chase, testifies during the Senate Banking, Housing, and Urban Affairs Committee hearing titled Annual Oversight of the Nations Largest Banks, in Hart Building on Thursday, September 22, 2022. (Tom Williams/CQ-Roll Call, Inc via Getty Images)
JPMorgan CEO Jamie Dimon has rejected suggestions that the First Republic deal concentrates too much power in his bank. (Tom Williams/CQ-Roll Call, Inc via Getty Images) (Tom Williams via Getty Images)

Warren raised her concentration concerns separately in a May 17 letter to Hsu and FDIC Chairman Martin Gruenberg. In that letter she cited a $2.6 billion profit JPMorgan expects to book from the First Republic sale.

"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," Warren said in her letter.

"What additional regulatory requirements will be placed on JPMorgan to ensure that the bank’s acquisition of First Republic does not increase systemic risks to the financial system or reduce competition?"

Gruenberg, who also appeared before the Senate Banking Committee Thursday, offered a number of new details about the fall of First Republic in his prepared testimony.

The lender first ran into troubled following the March 10 failure of Silicon Valley Bank, losing more than $100 billion in deposits in March. When it told investors about those outflows on April 24, a run on the bank began again. It lost another $10 billion between April 26 and April 28, Gruenberg said.

Michael J. Hsu, Acting Comptroller of the Currency, testifies during the Senate Banking, Housing, and Urban Affairs oversight hearing on financial stability, supervision, and consumer protection in the wake of recent bank failures, Thursday, May 18, 2023, on Capitol Hill in Washington. (AP Photo/Mariam Zuhaib)
Michael J. Hsu, acting Comptroller of the Currency, faced questions about the First Republic sale to JPMorgan. (AP Photo/Mariam Zuhaib) (ASSOCIATED PRESS)

The outflows caused the FDIC to downgrade the bank to "problem status" on April 28, he said, which changed the bank's borrowing status with the Federal Reserve and made it even more difficult to meet its liquidity demands.

The FDIC invited 21 banks and 21 nonbanks to participate in a bidding process, according to Gruenberg. That included JPMorgan, Bank of America (BAC), and PNC, according to people familiar with the matter. Citizens and US Bancorp (USB) were also reportedly invited.

It received 12 bids from four bidders, Gruenberg said. The FDIC requested best and final offers from the four bidders by 7 pm ET on April 30. The sale to JPMorgan was announced in the early hours of May 1.

Trying to beat JPMorgan in a bidding war is like “pitching against the Yankees," one banking executive told Yahoo Finance this week. "Like, why even bid?”

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