Veteran of 1980s banks crisis hits out at sale of First Republic to JPMorgan

A former regulator credited with stabilising the US banking system during the 1980s crisis has hit out at the decision to sell First Republic to JPMorgan Chase as he warned of “more problems” to come for regional lenders.

After San Francisco-based First Republic suffered a $100bn deposit run, the Federal Deposit Insurance Corporation solicited bids from multiple banks before selling most of the assets to JPMorgan, the largest bank in the US, for $10.6bn on Monday. The regulator said it had tried to minimise losses to the deposit insurance fund, which will come to $13bn under the deal.

However, Bill Isaac, who chaired the FDIC during the start of the savings and loan crisis and managed the collapse of what was then the seventh-largest bank in the country, Continental Illinois, said that priority was misguided.

“I don’t think it is right to sell a failed bank to the largest bank in the country just because it paid the highest price,” he said. “You make the largest banks bigger and bigger and you have fewer choices going forward. The FDIC has fewer choices next time and consumers have fewer choices.”

A 1992 law requires the FDIC to seek the “least cost” solution but Isaac pointed out regulators are also required to consider a much broader range of factors including competition when deciding whether to approve bank deals.

“The FDIC and other regulators should always have a choice to do what’s best for the country, even if it costs more,” he said. “Now there’s one less bank in the wealth space and the biggest bank has gotten bigger. Is that healthy? Is that what we want?”

JPMorgan’s size means it is covered by a law barring acquisitions by banks with more than 10 per cent of US domestic deposits. The First Republic deal, and one in 2008 when JPMorgan purchased the assets of Washington Mutual, fall under an exception for deals involving failed banks.

Isaac said he believed JPMorgan chief executive Jamie Dimon had done “a great public service” in buying troubled banks. “I just question whether that is the outcome we should want as a matter of public policy.”

Based his experiences in the 1980s S&L crisis, when rising interest rates contributed to the failure of more than 3,000 banks and savings and loans associations including eight of the 10 largest banks in Texas, Isaac said he believes there is more pain to come.

“We are kidding ourselves if we think there are only four problem banks in the country,” Isaac said. “We have not gotten that smart. It’s been so long since we had a lot of problems, that I can’t help but think that there are going to be more problems.”

Late on Wednesday, PacWest became the latest bank to seek a financial lifeline amid the turmoil. Its shares plunged 50 per cent in after-hours trading following reports it was exploring strategic options including a potential sale.

While at the FDIC, Isaac was credited with highlighting the potential impact of rapidly rising interest rates and setting up teams at the regulator to prepare for the wave of bank failures that eventually materialised.

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