As I reported yesterday, United States banking giant JPMorgan Chase & Co has acquired First Republic Bank, a San Francisco-based lender, following its seizure by regulators.
The approval of this deal, once considered unthinkable due to the “too big to fail” stigma from 2008, indicates a potential change in regulatory stance as banks grapple with the challenges of a deteriorating economy.
JPMorgan CEO Jamie Dimon believes that this acquisition could be the beginning of increased consolidation within the banking industry, with large regional banks merging to better compete with banking giants, and small to mid-size lenders being taken over as customers flock to larger institutions.
Consolidation period on the horizon
Various factors have contributed to the current environment that could lead to more industry consolidation. Many banks with a high proportion of uninsured deposits are experiencing pressure as customers seek safety, forcing these institutions to raise capital.
Additionally, costly regulations resulting from the recent crisis could further strain banks’ bottom lines, driving them to seek mergers. The looming recession and rising defaults in the commercial real estate market, coupled with shrinking profits, may also spur tie-ups.
Dan Goerlich, a partner at PwC specializing in U.S. financial deals, stated, “There are a lot of signs pointing to the fact that the consolidation period has just begun.”
Currently, the U.S. has over 4,700 banks, but Greg Hertrich, head of U.S. depository strategies at Nomura, predicts that only half of these institutions will survive the next decade.
Regulatory hurdles and antitrust concerns
However, the extent to which regulators will allow banks, particularly larger ones, to engage in mergers outside of crisis situations remains uncertain.
The Biden administration has expressed concerns about antitrust issues arising from such deals, resulting in some bank deals being held up for months awaiting approvals.
In the cases of Silicon Valley Bank and Signature Bank, both were closed in March without buyers, a decision that some analysts and investors argue fueled the most turbulent period in banking since the 2008 crash.
However, the case of the First Republic suggests a shift in regulatory thinking. The bank was given the opportunity to seek a private sector solution to its problem for several weeks before its eventual failure. Regulators then stepped in to auction the bank’s assets over a weekend.
Jefferies analysts note that Monday’s deal demonstrates that larger banks with deeper pockets are better positioned than mid-sized lenders. They wrote, “This may have precluded other regional bank bidders from making the math work as well as it does for JPM.”
