Regulators prepare to step in and sell First Republic – 04/30/2023 – Market

US federal regulators were racing on Saturday to step in and sell First Republic Bank before the country’s financial markets opened on Monday, according to several people with knowledge of the matter, in a attempt to end the banking crisis that began last month with the collapse of Silicon Valley Bank.

The effort, led by the FDIC (US deposit guarantor), comes after First Republic shares have fallen 75% since Monday, when the bank reported that customers had withdrawn more than half of their deposits. It became clear last week that no one was willing to bail out First Republic ahead of government intervention, because the larger banks feared that buying the company would saddle them with billions of dollars in losses.

The FDIC has been in talks with banks including JPMorgan Chase, PNC Financial Services and Bank of America about a potential deal, three of the people said. A deal could be announced as early as Sunday, these people said, warning that the situation was rapidly evolving and could still change. Any buyer would likely take over First Republic deposits, eliminating the need for a government guarantee on deposits in excess of $250,000 — the FDIC limit for deposit insurance.

It is possible that an agreement cannot be reached, in which case the FDIC would need to decide whether to take First Republic and assume ownership. In that case, federal officials could invoke a systemic risk exception to protect these larger deposits, something they did last month after the failures of Silicon Valley Bank and Signature Bank.

The FDIC began sounding out potential buyers late last week, when it became clear there were few options outside of a government takeover, one of the sources said. On Friday, the FDIC reportedly asked potential bidders to submit binding offers by Sunday. Those potential bidders had access to detailed information about the First Republic’s finances, said another person familiar with the situation.

The sources requested anonymity because the process is confidential. Bloomberg and The Wall Street Journal previously reported on the talks. The FDIC declined to comment. The guarantor is working with financial advisory firm Guggenheim Partners on the lawsuit, according to three people with knowledge of the situation.

US regulation prevents JPMorgan Chase and Bank of America from acquiring another depository bank because of their size. To be able to buy the First Republic, they would need an exemption from the US banking regulator.

JPMorgan Chase, PNC and Bank of America were part of a consortium of 11 major banks that temporarily deposited $30 billion in First Republic last month as part of an industry move to shore up the bank. But this lifeline did little to quell concerns about the First Republic’s viability.

First Republic, based in San Francisco, serves wealthy clients working in sectors such as technology and finance and has been considered the most vulnerable regional bank since the start of the banking crisis in March with the sudden collapse of Silicon Valley Bank. The bank startled investors and customers again by revealing on Monday that it had lost $102 billion in deposits, much of it in just three weeks in March, not including the $30 billion in deposits it took from 11 big banks. The outflow was well over half of the $176 billion he held at the end of last year.

Like Silicon Valley Bank, the First Republic also suffered losses on its loans and investments as the Federal Reserve quickly raised interest rates to fight inflation.

First Republic had hoped to strike a deal before it was placed in receivership by the FDIC, because government intervention would mean that the company’s shareholders and some of its bondholders would likely lose all or most of their investment. As of Thursday night, the bank and its advisers had held talks with the government, some banks and private equity firms about a possible deal. But neither the government nor the banks were interested in such a deal, one of the people said.

By Friday morning, it was clear to all concerned that the First Republic had no option but government intervention, the people said. First Republic shares ended Friday down a further 43% and continued to slide in extended trading.

First Republic was worth just $650 million as of Friday afternoon, down from more than $20 billion before the March crisis, a reflection of investors’ perception that shareholders could be wiped out.

A sale to a larger bank would likely mean that all First Republic deposits would be protected as they would become accounts at the acquiring bank. That includes unsecured deposits, which totaled $50 billion at the end of March — a figure that includes the $30 billion held by the 11 big banks.