Federal regulators were racing on Saturday to seize and sell off the troubled First Republic Bank before financial markets open Monday, according to several knowledgeable people, trying to end 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comes after shares of First Republic fell 75 percent since Monday, when the bank announced that customers had withdrawn more than half of its deposits. It became clear over the past week that no one was willing to bail out First Republic before the government seized it, as larger banks feared buying the company would leave them with billions of dollars in losses.
The FDIC has spoken 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 is evolving quickly and could change. Any buyer would most likely take First Republic’s deposits, eliminating the need for a government guarantee for deposits over $250,000 — the deposit insurance limit.
A deal may not be reached, in which case the FDIC would have to decide whether to seize First Republic and take ownership for itself after all. In that case, federal officials could invoke a systemic risk exemption to protect those larger deposits, something they did after the defaults of Silicon Valley Bank and Signature Bank in March.
The banking regulator began polling potential buyers late last week when it became clear there were few options beyond a state takeover, one of the people said. On Friday, the FDIC asked potential bidders to submit binding bids by Sunday, this person said. Those potential bidders have been given access to detailed information about First Republic’s finances, one of the people said.
The people asked for anonymity because the process is confidential. Bloomberg and The Wall Street Journal previously reported on the talks. The FDIC declined to comment. The FDIC is working with financial advisory firm Guggenheim Partners on the process, according to three experts.
Regulations prevent JPMorgan Chase and Bank of America from acquiring another depository bank because of their size, and regulators would have to grant an exemption if any of those banks were to acquire First Republic.
Progressive Democrats weren’t happy about JPMorgan or Bank of America acquiring the bank, as such a deal would make the already huge institutions bigger, and that things were likely to lean a bit towards PNC, another 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 major 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 allay concerns about First Republic’s viability.
Based in San Francisco and with most of its branches on the coast, where it serves wealthy clients working in sectors such as technology and finance, First Republic has been considered the most vulnerable regional bank since the banking crisis began in March with the sudden collapse of Silicon Valley Bank. First Republic once again spooked investors and customers by revealing 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 major banks. The outflow was more than half of the $176 billion it held at the end of last year.
Like Silicon Valley Bank, 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 close a deal before it was placed under FDIC receivership because a government seizure would mean that company shareholders and some of its bondholders would likely lose all or most of their investment. Until Thursday evening, the bank and its advisers continued to talk to the government, some banks and private equity firms about a possible deal. But neither the government nor the banks were ultimately interested in such a scheme, one of the people said.
By Friday morning, it was clear to all involved that First Republic had no choice but a government takeover, the people said. Shares of First Republic closed another 43 percent lower on Friday and continued to fall during extended trading.
First Republic was worth just $650 million as of Friday afternoon, up from more than $20 billion before the crisis in March, reflecting investor awareness that shareholders could be wiped out.
A sale to a larger bank would likely mean that all of First Republic’s deposits would be protected, as they would become accounts with the acquiring bank. That includes uninsured deposits, which totaled $50 billion at the end of March — an amount that includes the $30 billion from the 11 major banks.
By trying to line up a buyer for First Republic before the bank is formally placed in receivership, regulators seem to be hoping to avoid the tumult that marked the fall of Silicon Valley Bank. It took several weeks for government officials to sell what remains of that bank to First Citizens BancShares, in a deal that included about $72 billion in loans at a heavily discounted price.
And the government seemed to be learning from the fall of Silicon Valley Bank in another way: The information it provided potential buyers about First Republic’s financial situation was much more detailed than what it provided in the case of Silicon Valley Bank, according to a of the people. Government officials spent extra time compiling a more sanitized set of facts that mapped out the bank’s relationships and risks.
The government would like to find a buyer for a bankrupt bank as soon as possible in order to minimize losses to the government’s deposit insurance fund. The longer it takes to find a buyer, the more likely customers and employees are to leave a bankrupt bank and leave behind a quickly-withering business.
PNC, one of the nation’s largest regional banks based in Pittsburgh, had previously considered buying First Republic. But PNC couldn’t make a deal work because, according to one, it would have to bear large losses on First Republic’s relatively low home mortgages and other loans. The accounting challenges of First Republic’s loans also deter other potential buyers.
JPMorgan CEO Jamie Dimon was a key architect of the plan to inject $30 billion into First Republic Bank. During the 2008 financial crisis, Mr. Dimon led the rescue of two banks: Bear Stearns and Washington Mutual.
Jeanna Smilek reporting contributed.
