Following the bank failures in 2023 that marked the most significant US bank collapses since the 2008 financial crisis, the country’s largest lender JPMorgan Chase & co. found itself in a familiar position—acquiring a weakened competitor, attracting its clients, and generating record profits in the process.
Over a decade after promises to control the dangers posed by banks deemed “too big to fail,” White House officials found themselves on a call.
During the conversation, a participant questioned why JPMorgan Chase & Co. had been permitted to acquire First Republic Bank earlier that day through a government-led auction.
In a straightforward response, Treasury Secretary Janet Yellen explained that JPMorgan Chase & Co. secured the acquisition due to submitting the highest bid.
Bank Failures in 2023
For the majority of the industry, 2023 brought a gloomy outlook. During the initial six months, numerous regional lenders faltered. Few banks collapsed as increasing interest rates severely reduced the value of their assets. These bank failures in 2023 resulted in burdening US banks with $684 billion in unrealized losses.
To retain depositors, many companies have invested substantially, while others began discussing the potential for defaults on commercial real estate loans.
In batches, bond-rating firms downgraded banks, adding to the challenges faced by the sector.
JPMorgan’s Financial Triumph
In March, as the troubles began surfacing, jittery depositors flocked to JPMorgan, bringing in over $50 billion.
Throughout the year, the firm’s executives repeatedly increased expectations for net interest income, the gap between what a bank earns on loans and what it pays to savers, ultimately reaching a level where managers now caution against “over-earning.”
Amid the bank failures in 2023, this has positioned JPMorgan for the most substantial annual profit in the history of US banking.
The earnings accumulated in the first nine months alone would stand as the company’s second-best year ever. Analysts anticipate that by the end of this month, its annual net income will surge by 36% compared to last year, while the combined earnings of the next five largest banks are expected to rise only about 1%.
In 2023, JPMorgan’s stock has reached a record high, experiencing a 26% increase and outpacing all major competitors, while both the 24-member KBW Bank Index and the 50-firm KBW Regional Banking Index have declined.
Competitive Auctions and Industry Frustration
When the Federal Deposit Insurance Corp. declared JPMorgan as the winner in the auction for First Republic, describing the process as “highly competitive,” it emphasized that the bank led by Jamie Dimon for 18 years had the smallest impact on the agency’s main insurance fund.
However, despite this, some regulators expressed discomfort with the outcome. Consumer Financial Protection Bureau Director Rohit Chopra, addressing the Senate Banking Committee, raised concerns about the bank consistently acquiring failed institutions, even in the presence of other bidders.
A Treasury spokesperson, in response to inquiries about the White House call, declined to comment, stating that the resolution of First Republic was carried out with the least cost to the Deposit Insurance Fund, safeguarding all depositors.
It’s unsurprising that JPMorgan could offer the most substantial sum, given that the bank is four times larger than the combined size of all three other bidders – PNC Financial Services Group Inc., Citizens Financial Group Inc., and Fifth Third Bancorp.
To put it into perspective, since Jamie Dimon acquired Bear Stearns and Washington Mutual during the 2008 financial crisis, JPMorgan has accumulated assets equivalent to the size of Wells Fargo & Co., the fourth-largest US bank.
“Other banks are expressing a certain level of frustration,” remarked Lee Raymond, the seasoned oil executive with 33 years on JPMorgan’s board.
He emphasized that when challenges arise, it presents an opportunity for JPMorgan to acquire assets that others desire but may not be positioned to secure.
JPMorgan is ‘Too Big to Fail’
The notion that certain banks are “too big to fail” gained prominence in the 2008 crisis, with officials stressing the need to rescue lenders whose failure could have devastated the global financial system.
While the term initially carried a negative connotation, the sheer size has transformed into a symbol of stability, drawing in clients during periods of uncertainty.
In 2023, smaller lenders faced a greater reliance on net interest income, which experienced a decline. Bank failures in 2023 emphasized additional challenges flagged by their executives, including the escalating costs of staying abreast of technological advancements.
JPMorgan, for instance, now allocates an annual tech budget surpassing the revenue of all but the largest regional banks.
Furthermore, the firm elevated its projection for the benefits derived from its adoption of artificial intelligence this year.
The unexpected vulnerability of certain small and midsize lenders has led regulators to scrutinize the entire sector, potentially increasing their operational costs.
According to Keith Noreika, the acting comptroller of the currency in 2017, this added scrutiny will pose a greater challenge for smaller lenders in their efforts to close the gap with industry giants.
Challenges and Triumphs in Banking
The size doesn’t ensure success. Citigroup, once the largest US bank, leaned heavily on taxpayer support during the financial crisis.
Similarly, Wells Fargo held the title of the most valuable US bank until 2016 when a series of scandals placed it under regulatory scrutiny.
Despite JPMorgan’s massive size and reputation for staying out of trouble, its record is not flawless. This month, the bank lost an appeal in a European Union court, resulting in a €337.2 million ($372 million) fine for manipulating the Euribor benchmark.
Last month, a $290 million settlement with Jeffrey Epstein’s victims was approved. This marked one of two agreements the firm made this year to address allegations of neglecting red flags while offering financial services to the convicted sex offender. Surprisingly, such issues often have minimal impact on the stock.
As 67-year-old Jamie Dimon extends his leadership at JPMorgan indefinitely, the firm’s value surpasses that of its two closest competitors combined. Currently, its market value constitutes approximately 27% of the total value of the KBW Bank Index, a notable increase from the 12% figure when Dimon assumed leadership.