February 23, 2024



The fate of First Republic Bank has become a game of chicken between the U.S. government and the bank’s biggest rival, as each side seeks to avoid huge losses and hopes that the other can deal with the troubled company.

As the bank’s shares continue to slide — down 49% on Tuesday and 30% on Wednesday — regulators have so far stayed off the hook. They have been waiting to see if the banks that deposited $30 billion with First Republic last month can reach a deal to ensure the company doesn’t fail and take some of their money.

Top FDIC officials even discussed whether to lower their private assessment of the bank, a move that would limit its access to the Fed’s lending facility.

On the other hand, executives at several big banks are reluctant to get more involved in a way that could lock in losses. Some expect that if they wait, they’ll get at least some of those deposits back — and possibly fare better than if they had intervened, possibly throwing money at bad debts.

“People were a little nervous about the way the banks in Silicon Valley were going down, and maybe they wanted to see if the First Republic could figure it out on its own,” said Stephen Luben, a professor at Seton Hall University School of Law.

“Regulators may also be concerned, if this doesn’t stop, who’s next?” he said. “That is, who will be in the hot seat after the First Republic?”

A spokesman for First Republic declined to comment.

First Republic’s problems stemmed from its reserves of low-interest loans, including an unusually large portfolio of huge mortgages to wealthy clients. Those debts have lost value amid Fed rate hikes, prompting some savers to withdraw their funds.

The collapse of Silicon Valley Bank in March raised concerns about the soundness of regional lenders, with First Republic paying more for financing than it was earning on many of its assets. That means the company faces at least a year of losses that analysts forecast.

The bank remains fully operational, and executives emphasized in Monday’s earnings report that it has ample cash to serve customers.

Still, its leaders admit they are looking at strategic options.

The time for such an agreement began to tick away late last week. U.S. regulators reached out to some industry leaders to encourage renewed efforts to find a private solution to shore up First Republic’s balance sheet, according to people familiar with the matter.

The calls also warn that banks should brace themselves in case something happens soon.

Many rescue proposals have so far failed to materialize.

Earlier this week, Bloomberg reported that First Republic was considering selling $50 billion to $100 billion in assets to big banks, which would also receive warrants or preferred stock as a way to buy the assets at a premium to market value. excitation.

By Wednesday, the company’s advisers were privately bouncing around a similar notion that stronger banks would buy bonds off First Republic’s books for more than they were worth so that it could sell the stock to new investors. While this means taking an initial loss, the bank can hold the debt by repaying it.

In that case, proponents suggest, big banks could save money by securing their $30 billion in deposits and avoiding a special FDIC assessment if regulators step in.

But executives at the five largest banks, speaking on condition of anonymity, dismissed the idea of ​​banding together again to support the First Republic, especially when it could mean paving the way for investors or rivals to buy the company for cheap price.

One person expresses a willingness to participate — provided regulators compel the group to take action.

Recovery deposit
Several banks would prefer that the FDIC take over and sell First Republic if necessary. Such a solution would be cleaner, they say, even if the banks lose money. Some have taken reserves.

Those banks accounted for most of the $50 billion in unincorporated deposits at the end of the first quarter at the First Republic. But, as depositors, they will be at the forefront of recovering their funds if the First Republic is resolved. Two top executives at their companies each contributed $5 billion in deposits last month, saying they would recover at least some — though not all — of that money in a worst-case scenario.

Across the industry, First Republic’s quarterly earnings report on Monday has been dismissed as a disaster. The company announced a larger-than-expected drop in deposits, then declined to answer questions as executives held a 12-minute briefing on the results.

Shares quickly took a dive later in the day. Collectively, they’re down 95% this year. They were up 15 percent in Thursday’s 12:26 p.m. trading in New York.

press forward
Regardless of the stock, First Republic is likely to move forward indefinitely, industry executives said.

The FDIC has shown that it is in no rush to take over the company and take another multibillion-dollar hit to its insurance fund.

The apparent gridlock comes just weeks after US Treasury Secretary Janet Yellen tout She helped JPMorgan Chief Executive Jamie Dimon orchestrate a $30 billion capital injection in a show of support for the financial system.At the time, most of the big U.S. banks were willing to show interest in participating, noting that those effort In the most recent earnings report, Dimon said they both “did the right thing.”

For would-be rescuers, the collapse of SVB and Signature Bank last month offers an unfortunate reminder that bidders can sometimes gain the best advantage by waiting patiently and buying a bank or its assets after the agency intervenes. A profitable deal.

Both acquirers saw their shares skyrocket after the lenders were sold.