First Republic faces federal seizure as FDIC seeks buyers
According to four people familiar with the matter, federal regulators raced Saturday to seize and sell struggling First Republic Bank before financial markets open Monday in a bid 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comes after First Republic shares have fallen 75 percent since Monday when the bank announced customers had withdrawn more than half of their deposits. Last week, it became clear that no one was ready to bail out First Republic from a government seizure because major banks feared buying the company would cost them billions in losses.
The FDIC has been in talks with banks including JPMorgan Chase and PNC Financial Services about a potential deal, two of the people said. A deal could be announced as early as Sunday, these people said, warning that the situation was evolving rapidly and could still change. Any buyer would most likely assume First Republic deposits, eliminating the need for a federal guarantee for deposits over $250,000 — the limit for deposit insurance.
It is possible that no agreement will be reached, in which case the FDIC would have to decide whether to seize First Republic anyway and take property itself. In that case, federal officials could invoke a systemic risk exemption to protect those larger deposits, which is what they did after the collapses of Silicon Valley Bank and Signature Bank in March.
The FDIC began looking for potential buyers late last week when it became clear there were few options outside of a government takeover, one of the people said. As of Friday, the FDIC was asking potential bidders to submit binding bids by Sunday, this person said.
The individuals asked for anonymity as the process is confidential. Bloomberg and the Wall Street Journal previously reported on the talks. The FDIC declined to comment.
JPMorgan Chase and PNC were part of a consortium of 11 major banks that temporarily injected $30 billion into First Republic last month to prop up the bank. But this lifeline did little to allay concerns about the viability of the First Republic.
First Republic, which is based in San Francisco and has most of its branches on the coasts where it serves affluent customers involved in industries like technology and finance, has been considered the most vulnerable regional bank since the banking crisis began in March Silicon Valley Bank. First Republic spooked investors and customers again by revealing on Monday 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 had. The outflow was well over half of the $176 billion it was holding late last year.
Like Silicon Valley Bank, the First Republic suffered losses on its loans and investments as the Federal Reserve quickly raised interest rates to fight inflation.
First Republic had hoped to reach a settlement before it was placed under FDIC receivership, as a government seizure would mean the company’s shareholders and some of its bondholders would likely lose all or most of their investment. As of Thursday evening, the bank and its advisors remained in talks with the government, some banks and private equity firms about a potential deal. But neither the government nor the banks are ultimately interested in such a regulation, one of the people said.
On Friday morning, it was clear to everyone involved that First Republic had no choice but to take over the government, the population said. First Republic stock closed another 43 percent on Friday and fell further in extended trading.
First Republic was worth just $650 million as of Friday afternoon, down from more than $20 billion before the March crisis, reflecting investors’ realization 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 with the acquiring bank. That includes uninsured deposits, which totaled $50 billion at the end of March — a total that includes the $30 billion from the 11 big banks.
By trying to find a buyer for First Republic before officially declaring bankruptcy, regulators appear to be hoping to avoid the uproar that marked Silicon Valley Bank’s fall. It was several weeks before government officials sold what remained of that bank to First Citizens BancShares, in a deal that included about $72 billion in loans at a heavily discounted price.
The government prefers to find a buyer for a failing bank as quickly as possible to minimize losses to the government deposit insurance fund. The longer it takes to find a buyer, the more likely it is that customers and employees will leave a failed bank, leaving behind a rapidly declining business.
Pittsburgh-based PNC, one of the country’s largest regional banks, had previously considered buying First Republic. But PNC couldn’t get a deal to work because, according to one of the people, it would have to absorb large losses on the First Republic’s relatively low-interest mortgages and other loans. The challenges in accounting for First Republic’s loans are also deterring other potential buyers.
JPMorgan CEO Jamie Dimon was one of the key architects 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.
