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With the failure of First Republic Bank coming weeks after March’s unexpected bank failures, the banking industry will likely continue to see short- and long-term effects from the turmoil, local executives say.
Even as regulators and customers question the safety and soundness of banks, the turmoil has also given banks opportunities to strengthen client relationships and pick up new business.
“People are looking at the relationships that they have with their bank,” said Kathleen Murphy, president and CEO of the Massachusetts Bankers Association. “I know many of our members have spent a lot of time talking with their clients, helping them understand the strength of their balance sheets. Those client relationships are really important, and our members have spent a lot of time reassuring and being there for them, and in turn that has certainly been welcomed by their clients.”
Regulatory Changes Coming, Too
Even before the recent spate of bank failures, the industry had faced challenges, particularly from the Federal Reserve’s rapid rate increases and their effects on the cost of deposits, loan yields, net interest margins, mortgage refinancing and loan demand. While the Federal Reserve signaled last week that it was likely to pause its rate-hike campaign, many bankers are anxious to know how long this period of elevated rates will last.
Now, banks are looking out for regulatory effects from having three banks fail, including two which saw the FDIC cover uninsured deposits.
Murphy noted that banks will soon need to begin implementing revised Community Reinvestment Act regulations, as well as new small business lending data collection requirements. Banks want to see a thoughtful approach to any regulatory changes, Murphy said.
“We would like the regulators and the policymakers to be very circumspect as they think through this environment and before they make wholesale changes and decisions regarding regulation,” she said. “Regulatory challenges are real; every time a new regulation goes into effect, there is a direct cost to banks.”
It’s an open question how heavily JPMorgan Chase will seek to compete with other lenders in areas that First Republic Bank dominated. iStock photo
Less Competition in Jumbo Market
The bank failures’ effects on the competitive landscape, particularly around Greater Boston, also remain to be seen.
First Republic was among Greater Boston’s top mortgage lenders to high-net-worth individuals and was Suffolk County’s top lender with 576 mortgages for $572 million, according to The Warren Group, publisher of Banker & Tradesman. JPMorgan Chase, by contrast, only did 63 residential purchase loans for $52.1 million in Suffolk County last year.
Only Arlington-based Leader Bank beat out First Republic in total purchase mortgage volume among bank lenders in 2022 and 2021.
Newton-based The Village Bank had counted First Republic and the former Boston Private among its competitors for jumbo mortgages, said Andrew Franklin, chief lending officer at The Village Bank. He said the bank launched an interest-only jumbo mortgage five years ago to compete in the market.
First Republic’s $1.75 billion in residential purchase mortgages last year represented 9 percent of the volume among bank lenders statewide and 4.2 percent of all mortgage purchase volume. That share of the market gets even bigger among the largest loans.
That competition may be less stiff going forward.
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While JPMorgan Chase wants to retain much of the wealth management business it acquired following First Republic Bank’s failure, the bank does not plan to continue First Republic’s low-pricing model on jumbo mortgages.
“First Republic did a great job at service,” JPMorgan Chase CEO and Chairman Jamie Dimon said in a call with analysts just hours after it absorbed the failed bank. “But being in the low-cost lending business is not what JPMorgan does.”
JPMorgan plans to convert all of First Republic’s operations and technology over time into the Chase and J.P. Morgan brands, the bank said in its investor presentation, and the bank will not retain the First Republic name.
First Republic’s wealth management division will become part of J.P. Morgan Advisors, and the bank does want to retain First Republic’s wealth management teams.
Jeremy Barnum, JPMorgan’s chief financial officer, said in response to an analyst’s question during last week’s call that the bank in recent weeks had received unsolicited inquiries from a number of First Republic adviser teams about joining JPMorgan.
“We believe that our brand, the investment platform, the banking capabilities and our research can make us the firm of choice for many of these advisers,” Barnum said. “And we think JPMorgan is a great place for advisers to grow their practice and stay for the rest of their careers.”
Opportunities in Disruption
Franklin said The Village Bank and other community banks could benefit from the disruption happening in the market. Some of the questions that banks will look at, Franklin said, include whether JPMorgan Chase will continue to aggressively compete in the market and provide the high level of customer service First Republic was known for.
Franklin added that the sale of the failed banks is just part of the consolidation that has affected the market in recent years.
“With that consolidation, it leaves an opportunity for community banks like ourselves to fill that void with good customer service,” Franklin said. “And frankly that’s how we’ve been able to grow the bank so much in the last couple of years.”
Diane McLaughlin
Murphy also pointed to the importance of ensuring that the banking industry continues to have large, regional and community banks, which she said have different roles in providing credit to customers.
“That’s what makes such a vibrant [banking] industry here in Massachusetts,” Murphy said.
During last week’s call with analysts, Dimon – head of the country’s largest bank – was asked whether banks would have to be constructed more like JPMorgan, with higher capital and more liquidity, to instill confidence in the industry.
“What you want to do is have a healthier, strong, and competitive regional bank and community bank system,” Dimon said. “If they don’t [make regulations] intelligently, you’ll make it much harder for your community bank or regional bank, and you can do things that create a lot of security without creating additional, unnecessary burden. But that’s obviously going to be up to the regulators.”
