Federal Regulators Prepare to Seize and Sell First Republic Bank

Story updated as of 10:49pm PDT Sunday. Expect further updates Monday morning.

Federal regulators were racing over the weekend to seize and sell the troubled First Republic Bank before financial markets open on Monday, according to 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 Corporation, comes after shares of the San Francisco-based bank’s shares tumbled 75 percent since last Monday, when First Republic disclosed that customers had withdrawn more than half of its deposits.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 F.D.I.C. 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.

As of Sunday morning, at least a few bidders had been told that they had until noon to submit their offers, according to two people familiar with the matter. The Federal Deposit Insurance Corporation did not comment.

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

If officials decided against that, some economists warned that the consequences could be serious.

“The government needs to act in a way where the uninsured depositors get their money out in whole,” Lawrence Summers, a former Treasury secretary now at Harvard, said in an interview on Saturday, either through a takeover or by a government guarantee.

Failing to do so “runs a substantial risk of setting off a wave of further withdrawals from all but the largest of institutions,” he added.

The F.D.I.C. 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, it had 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, one of the people said.

The people requested anonymity because the process is confidential. Bloomberg and The Wall Street Journal reported the talks earlier. The F.D.I.C. declined to comment. The F.D.I.C. 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, and regulators would have to grant an exemption if one of those banks were to acquire First Republic.

Some progressive Democrats were not thrilled about the idea of having a large bank like JPMorgan take over First Republic, given that such a deal would make the already huge institution larger, and that probably tilted things slightly toward PNC, one person familiar with the situation said. Some other smaller regional banks also showed some interest in First Republic, this person said.

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 like 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 F.D.I.C. 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 Friday down another 43 percent 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’ realization that shareholders could be wiped out.

A sale to a larger bank would likely 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 characterized the fall of Silicon Valley Bank. It took several weeks for government officials to sell that bank’s remnants to First Citizens BancShares, in a deal that included about $72 billion in loans at a deeply discounted price.

And the government appeared to be learning from the fall of Silicon Valley Bank in another way: The information it provided on First Republic’s financial situation to potential buyers was much more detailed than what it provided in the case of Silicon Valley Bank, according to one of the people familiar with the matter. Government officials spent additional time putting together a more cleaned-up set of facts that mapped out the bank’s relationships and risks.

The government prefers to find a buyer for a failed bank as quickly as possible to minimize potential 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.

PNC, one of the country’s largest regional banks that is based in Pittsburgh, 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’s chief executive, 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.

  and  are reporters with The New York Times. Copyright 2023, The New York Times.

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