May 18, 2023

At Hearing, Senator Warren Warned of Heightened Risk of Concentration in the Banking System Following JPMorgan Acquisition of First Republic Bank

Video of Exchange (YouTube)

Washington, D.C. – At a hearing of the Senate Banking, Housing, and Urban Affairs Committee Senator Elizabeth Warren (D-Mass.) questioned Acting Comptroller of the Office of the Comptroller of the Currency (OCC), Michael Hsu, on his decision to approve JPMorgan Chase’s purchase of First Republic Bank after its collapse. This merger allowed a large, poorly supervised bank to be swallowed by America’s largest bank, making it $200 billion larger than it was before.

Transcript: The State of the Banking and Credit Union Industry: Assessing Regulators' Reports and Actions on Recent Bank Failures
U.S. Senate Committee on Banking, Housing, and Urban Affairs
Thursday, May 18, 2023

Senator Elizabeth Warren: Thank you, Mr. Chairman. 

Earlier this month, when First Republic Bank collapsed, multiple banks were interested in buying the failed bank. Banking regulators chose JPMorgan Chase – America's biggest bank. 

The result was that a gigantic, poorly supervised bank was swallowed up by an even more gigantic bank, and now the biggest bank in the country is about $200 billion bigger than it was before. 

In order for the deal to go through, two separate regulators had to sign off. When the FDIC sells a failed bank, the law requires it to choose the highest bidder that will result in the lowest cost to the Deposit Insurance Fund. But the law also requires signoff from the OCC, and the OCC's job, by law, is to consider whether the merger would pose “risk to the stability of the United States banking or financial system.”

Acting Comptroller Hsu, OCC regulations include a list of factors that the OCC must consider when evaluating “risk to the stability” of the banking system. Do you know the first item on the list?

Mr. Michael J. Hsu, Acting Comptroller, OCC: It relates to the financial stability – whether there's a threat to financial stability in the U.S.

Senator Warren: Whether or not – but what is the item you're supposed to consider? The very first one on the list?

Acting Comptroller Hsu: I believe it is whether the merger will have financial stability impacts. 

Senator Warren: Because of?

Acting Comptroller Hsu: Because of the merger.

Senator Warren: No, it's “whether the proposed transaction would result in a material increase in risks to financial system stability due to an increase in size of the combining institutions.” It troubles me that you don't remember this. How do we know if a purchasing bank poses more or less risk to the banking system?  One metric that regulators use is the G-SIB score, which estimates the impact on our financial system of the failure of each of our largest banks. The size of the bank is a big factor in its G-SIB score. So let's look at the G-SIB scores and figure out if JPMorgan, according to the OCC's own analysis, presented more risk to the banking system than the other bidders who have been widely reported in the press.

PNC tried to buy the failing bank, but you approved JPMorgan instead.  Acting Comptroller Hsu, is the G-SIB score for JPMorgan bigger than the equivalent score for PNC? 

Acting Comptroller Hsu: It is.

Senator Warren:  How much bigger?

Acting Comptroller Hsu: I don't know the exact magnitude of it off the top of my head.

Senator Warren: Do you want to make a guess?

Acting Comptroller Hsu: It's bigger.

Senator Warren: Eight times bigger. Does that sound right? Yeah.

Let's look at another bidder: Citizens Bank.  Is JPMorgan's G-SIB score—that's the score that shows risk to the banking system—bigger than the score for Citizens bank? 

Acting Comptroller Hsu: It is.

Senator Warren:  How much bigger?

Acting Comptroller Hsu: Significantly bigger.

Senator Warren: Fourteen times bigger?

Acting Comptroller Hsu: Perhaps. I don't have the exact scores in front of me.

Senator Warren: Acting Comptroller Hsu, your job, BY LAW, is to determine risk to the system from making big banks even bigger, and you have a clear metric for doing that—the G-SIB scores.  So how do you explain approving a sale to a banking giant that increases the risk to the banking system by somewhere between nearly 800% and 1,400% more than selling to other bidders?  Did you just ignore the fact that a failure at JPMorgan would blow a hole in our banking system that would be eight times more than the destruction to the financial system and let them grow by $200B?

Acting Comptroller Hsu: Senator Warren, for every merger application, we follow the law. We follow our guidelines. We follow our policies and procedures. Under the financial stability prong of a bank merger act, there are a number of factors. You named one. Had we followed a strict G-SIB  score methodology, to the exclusion of everything else, I fear that there would have been greater financial instability that weekend. When we make these decisions, I have to take into account a range of factors including –

Senator Warren: If I can – I know I'm nearly out of time, but if the Chairman will let me pursue for just a minute here. Are you telling me that there are other factors that weighed against the other bidders that weren't there for JP Morgan Chase and that's how it is that you went with the biggest bidder, even though the biggest bidder by your own G-SIB scores, increases risks to the financial system?

Acting Comptroller Hsu: What I'm saying is that a G-SIB score approach to that factor, that weekend, would not have been a wise one –

Senator Warren: Because? That's why we're here to exercise oversight. You can't just say I decided on something else without putting some facts behind that.

Acting Comptroller Hsu: The G-SIB score framework is not part of the framework that is listed there. There's a number of factors there. It's very important, especially when there's a failing bank situation is that the government act in a coordinated and timely manner, that we minimize losses to the DIF –

Senator Warren: You have one job to do and I appreciate it. I'm out of time here and I appreciate your forbearance here, Mr. Chairman, but I do want to say the single biggest threat to the U.S. banking system is concentration. We're all pushing harder for merger guidelines so that we don't get more concentration in the banking system. You are the one person who was supposed to use judgment on the question of: as between multiple sales, which one was the right one to go with and which one presented more risk to the banking system? According to your own metric, you chose the one that gives us more concentration in the system. I am very troubled by that decision.