May 1 (Reuters) - JPMorgan Chase & Co (JPM.N) emerged as the winner of an auction of troubled First Republic Bank (FRC.N) on Monday, in a deal aimed at drawing a line under a recent banking crisis even as it makes the largest U.S. bank even bigger.
First Republic was among regional U.S. lenders most battered by turmoil in the banking sector in March, when depositors fled en masse from smaller banks to giants like JPMorgan as they panicked over the collapse of two other mid-sized U.S. banks.
The bank had limped along since then, but investors fled again last week when it disclosed more than $100 billion in outflows in the first quarter and a plan to explore new options.
Barely a week later, California regulators had seized First Republic and put it into FDIC receivership alongside the sale of its assets, marking the third failure of a major U.S. bank in two months and the largest since Washington Mutual in the 2008 financial crisis.
JPMorgan will pay $10.6 billion to the U.S. Federal Deposit Insurance Corp (FDIC) as part of a deal to take control of most of the San Francisco-based bank's assets and get access to First Republic's coveted wealthy client base.
"Our government invited us and others to step up, and we did," said Jamie Dimon, JPMorgan Chairman and CEO, who had been a key player in the 2008 financial crisis, buying Bear Stearns in a weekend rescue.
It will cost FDIC's Deposit Insurance Fund about $13 billion, according to the regulator's initial estimate.
U.S. President Joe Biden on Monday hailed the deal for protecting depositors without making taxpayers foot the bill. He repeated his call for stronger regulation and supervision of large and regional banks.
"These actions are going to make sure that the banking system is safe and sound," Biden told an event at the White House. "Critically, taxpayers are not the ones that are on hook."
Shares of JPMorgan and some of the other the largest U.S. banks rose on Monday, while those of mid-tier banks fell. First Republic shareholders will be wiped out in the transaction, Wedbush analysts said. The bank's shares tumbled 43.3% in premarket trading on Monday before they were halted.
TOO BIG TO FAIL?
Analysts and industry executives said the deal -- struck over the weekend after the FDIC ran an auction process that saw several other banks bid -- should calm markets. But they added that it came at a cost: the biggest banks were getting stronger while it was getting harder for smaller banks to do business.
Dennis Kelleher, president and CEO of Wall Street reform group Better Markets, said the auction's outcome showed "unhealthy consolidation, unfair competition, a dangerous increase in too-big-to-fail banks -- all while harming community banks, small business lending, and economic growth.”
"Regulators need a much better game plan for resolving those dangerous banks when they get into trouble," Kelleher said.
JPMorgan already holds more than 10% of the nation’s total bank deposits. Wells Fargo analyst Mike Mayo wrote in a research note that JPM's net deposits would increase by 3% as a result of the deal.
"We need large, successful banks in the largest economy in the world," JPMorgan CEO Jamie Dimon told reporters on a conference call. "We have capabilities to serve our clients, who can be cities, schools, hospitals, governments. We bank the IMF, the World Bank. And anyone who thinks the United States should not have that can call me directly."
Jane Fraser, CEO of rival Citigroup, hailed the deal as resolving the last major source of uncertainty for the sector after a period of turmoil.
“Let’s not tarnish all the regional and small banks as having an enormous problem,” Fraser told a conference.
"This is not the world financial crisis, this is not the savings and loan crisis. There will be stress, but let’s be targeted where it is."
RISING RATES
Global banking has been rocked by the closure of Silicon Valley Bank and Signature Bank in March, as deposit flight from U.S. lenders forced the Fed to step in with emergency measures to stabilize markets while Switzerland's Credit Suisse (CSGN.S) had to be rescued by rival UBS (UBSG.S). Those failures came after crypto-focused Silvergate voluntarily liquidated.
Some blamed the root cause of the crisis in the banking sector on ultra-loose monetary policy for many years followed by an abrupt reversal and fast-paced interest rate hikes by the U.S. Federal Reserve over the past year.
Investors have priced in a 90% chance of another 25 basis point rate hike after the central bank's two-day policy meeting on Wednesday, according to CME Group's FedWatch tool.
"When it was just SVB, it was easy to blame management. However, now that we see the pattern, it is evident that the Fed has moved too far, too fast and is breaking things," said Thomas J. Hayes, Chairman and Managing Member, Great Hill Capital.
JPMorgan was one of several interested buyers including PNC Financial Services Group (PNC.N), and Citizens Financial Group Inc (CFG.N), which submitted final bids on Sunday in an auction by U.S. regulators, sources familiar with the matter said.
Jefferies analysts said JPMorgan's size may have played to its advantage, as it could make the math for the deal work better than the other bidders could.
JPMorgan has assumed all of the bank's deposits, it said, and will repay $25 billion of $30 billion big banks deposited with First Republic in March to help shore it up.
JPMorgan also entered into a loss-share agreement with the FDIC on single family, residential and commercial loans it bought, but will not take First Republic Bank's corporate debt or preferred stock.
The failed bank's 84 offices in eight states will reopen as branches of JPMorgan Chase Bank from Monday, it added.
