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Regulators prepare to seize and sell First Republic

JPMorgan, PNC and Bank of America are said to be interested in acquiring the troubled lender after it is seized by the Federal Deposit Insurance Corporation

Federal regulators were racing to seize and sell the troubled First Republic Bank before financial markets open Monday, according to several people with knowledge of the matter, in a bid to put an end to a banking crisis that began last month with the collapse of Silicon Valley Bank.

The effort, led by the Federal Deposit Insurance Corp., comes after First Republic’s shares tumbled 75 per cent since Monday, when the bank disclosed that customers had withdrawn more than half of its deposits. It became clear this past week that nobody was willing to ride to First Republic’s rescue before a government seizure because larger banks were worried that buying the company would saddle them with billions of dollars in losses.

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

It’s possible that an agreement won’t be reached, in which case the FDIC would need to decide if it would seize First Republic and take ownership itself. In that case, federal officials could invoke a systemic risk exception to protect those bigger deposits, something they did last month after the failures of Silicon Valley Bank and Signature Bank.

The FDIC started sounding out potential buyers late last week as it became clear that there were few options outside a government takeover, one of the people said. By Friday, the FDIC asked potential bidders to submit binding offers by Sunday, this person said. Those potential bidders have been given access to detailed information on First Republic’s finances, another person familiar with the situation said.

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

Regulations preclude JPMorgan Chase and Bank of America from acquiring another deposit-taking bank because of their size. The Office of the Comptroller of the Currency would have to grant an exemption if one of those banks were to acquire First Republic.

JPMorgan Chase, PNC and Bank of America were part of a consortium of 11 large banks that temporarily deposited $30 billion into First Republic last month as part of an industry effort to prop up the bank. But that lifeline did little to put to rest concerns about First Republic’s viability.

First Republic, which is based in San Francisco and has most of its branches on the coasts where it serves affluent customers who work in industries such as technology and finance, has been considered the most vulnerable regional bank since the banking crisis began unfolding in March with the sudden collapse of Silicon Valley Bank. First Republic spooked investors and customers anew by revealing on Monday that it had lost $102 billion in customer deposits, much of it in just three weeks in March, not including the $30 billion in deposits it received from the 11 big banks. The outflow was well over half the $176 billion it held at the end of last year.

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

First Republic had been hoping to strike a deal before being put into FDIC receivership, because a government seizure would mean shareholders of the company and some of its bondholders would probably lose all or most of their investment. Until Thursday night, the bank and its advisers remained in conversation with the government, some banks and private equity firms about a potential deal. But neither the government nor the banks were ultimately interested in such an arrangement, one of the people said.

By Friday morning, it was clear to everybody involved that First Republic had no option other than a government takeover, the people said. First Republic’s stock closed on Friday down another 43 per cent and continued falling 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’ realisation that shareholders could be wiped out.

A sale to a larger bank would probably mean that all of First Republic’s deposits are protected since they would become accounts at the acquiring bank. That includes uninsured deposits, which stood at $50 billion at the end of March — a sum that includes the $30 billion from the 11 big banks.

By seeking to line up a buyer for First Republic before formally putting the bank into receivership, regulators appear to be hoping to avoid the tumult that characterised the fall of Silicon Valley Bank.

The government prefers to find a buyer for a failed bank as quickly as possible to minimize losses to the government’s deposit insurance fund. The longer it takes to find a buyer, the more likely that customers and employees will abandon a failed bank, leaving behind a rapidly withering business.

Based in Pittsburgh and one of the largest US banks, PNC had previously considered buying First Republic. But PNC couldn’t make a deal work because it would have to take on large losses from First Republic’s relatively low-rate home mortgages and other loans, according to one of the people. The challenges of accounting for First Republic’s loans put off other potential buyers, too.

JPMorgan CEO Jamie Dimon was a key architect of the plan to inject $30 billion into First Republic Bank. During the 2008 financial crisis, Dimon led the rescue of two banks — Bear Stearns and Washington Mutual.

This article originally appeared in The New York Times