US regulators race to head off banking crisis as First Republic rescue looms

The US government has asked JPMorgan, PNC and several other financial groups, including a handful of non-bank investment firms, to bid for all or part of First Republic as US regulators try to determine how much it would cost to take over the embattled California lender.

It has become clear over the weekend to both First Republic and the government that stabilising the bank will almost certainly require the Federal Deposit Insurance Corporation (FDIC) to take it over, four people briefed on the situation said.

First Republic shares have lost more than 97 per cent of their value this year, driven down by concerns about paper losses on its mortgage book and other assets and massive deposit outflows after the March 10th collapse of Silicon Valley Bank.

On Wednesday the FDIC asked roughly a dozen banks to tell them what they would be willing to pay for First Republic’s deposits and assets, and what level of losses the FDIC would have to absorb to get the deal done, according to people familiar with the discussions.

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On Friday the regulator went back to JPMorgan, PNC and several other lenders and offered to give them access to more detailed information about First Republic. The potential bidders have been given digital access to a data room with extensive information on First Republic’s loans and other assets, according to two sources familiar with the process. A number of investment firms have also been given access to the data and encouraged to provide bids.

Banks and others have been told that bids are welcomed that would include First Republic being taken into receivership, and that a winning bid is likely to include some assistance from the FDIC’s insurance fund.

Guggenheim is advising the FDIC on the process, according to people familiar with the matter.

JPMorgan, which led an earlier effort to stabilise First Republic by convening a group of 11 banks to put $30 billion in deposits into the lender, is now preparing a bid for a post-resolution deal, three people briefed on the situation said. JPMorgan and PNC declined to comment.

It is not clear how many other banks will bid, or whether the FDIC will find any of the bids acceptable. When Silicon Valley Bank failed other lenders initially declined to bid, and the FDIC set up a bridge bank to give its customers access to their money.

The FDIC said: “We cannot comment on or confirm reports that we are bidding an open and operating bank.”

If San Francisco-based First Republic is taken over by the FDIC it would rank among the biggest bank failures in US history, alongside Washington Mutual in 2008 and Silicon Valley Bank.

First Republic’s business model of using low-cost deposits to fund cheap mortgages has been squeezed by rising interest rates. It revealed on Monday that customers have pulled out more than $100 billion in deposits as concerns rose about regional banks in the wake of Silicon Valley Bank’s collapse.

When a US bank fails the FDIC solicits bids from other lenders for its deposits and assets to determine which will best protect customers and minimise the cost to the government’s deposit insurance fund. The FDIC is funded by a levy on banks.

The goal is to find a buyer before the FDIC actually takes over. But that does not always happen. In Silicon Valley Bank’s case the FDIC used a so-called “systemic risk exemption” to guarantee all deposits, including those too large to be covered by deposit insurance. It is not clear whether it would do the same for First Republic’s large depositors.

Speaking on Sunday to CBS News, Ro Khanna, the Democratic representative from California, said the FDIC’s mandate is to look for the lowest-cost option even if that means First Republic falls into the hands of one of the country’s biggest banks.

He also renewed calls for the government to guarantee all bank deposits or risk further flight from regional banks into the top lenders. – Copyright The Financial Times Limited 2023

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