First Republic Bank is dead! Long live JPMorgan! JP Morgan's acquisition of failed First Republic Bank FRC makes it the most globally systemically important bank (G-SIB) in the U.S. In the Financial Stability Board’s list of GSIBs, JPMorgan will now be number five, only after the four Chinese G-SIBs.

JPMorgan’s role in the American financial industry harkens the days of J.P. Morgan rescuing the U.S. government in 1895 and later saving banks in 1913. While JPMorgan’s acquisition of First Republic may placate markets momentarily, it should bring up important discussions for U.S. legislators, policy makers, and bank regulators. Clearly, the Too Big To Fail problem is now worse than it was in the years running up to the 2007-2009 financial crisis.

After the California Department of Financial Services and Innovation closed down First Republic Bank this weekend, JPMorgan acquired most of the appointed receiver, the Federal Deposit Insurance Corporation. The purchase includes about $173 bn in loans, $30 bn of stocks and bonds at fair value, $92B of deposits ( which includes $25 bn from other big banks), and $28 bn of Federal Home Loan Bank Board (FHLBs). The FDIC is providing loss-share agreements and $50 bn in financing; JP Morgan did not disclose the rate in this morning analyst call. JPMorgan will pay the FDIC $10.6 bn, which means netting about a $2.6 bn after-tax gain.

Investors and bank regulators should take out a magnifying glass and look carefully at JPMorgan’s increased operation risk exposures. Operational risk is the potential loss in earnings due to problems with people, process, systems, and external events. JPMorgan will now have to spend time really taking a look at how it will integrate people, technology, and data from First Republic Bank. Given the First Republic failed due to serious mismanagement of interest rate and liquidity risks, JPMorgan will have to comb through all of First Republic banks’ policies, processes, and data quality. JPMorgan should use its own internal auditors and compliance officers to conduct serious due diligence of First Republic assets and liability.

Determining JPMorgan’s added interest rate risk is also important to note. A significant amount of First Republic's loan book consisted of jumbo mortgages. It will be important to monitor how the current higher interest rate environment will impact the mark-to-market on these relatively illiquid assets. JPMorgan will share this loss with the FDIC; the question is how much.

Also, due to JPMorgan's even more enormous size and added complexity, the bank’s regulators, the Federal Reserve and the Office of the Comptroller of the Currency are likely to require it to increase its G-SIB capital surcharge to help it sustain unexpected losses. Given JPMorgan’s significant interconnections to other financial institutions and the American economy, it is more important than ever that it is more capitalized.

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