(Bloomberg) — The fate of First Republic Bank has become a game of chicken between the U.S. government and the lender’s biggest rival, with both sides seeking to avoid steep losses and hoping the other will hold on. troubled company.
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As the bank’s stock continues to slide — down 49% on Tuesday and 30% on Wednesday — regulators have so far been holding back from stepping in. They waited to see if the banks that deposited $30 billion into First Republic last month could hash out a deal to ensure the company wouldn’t fail and bring some of their money with it.
Senior officials at the Federal Deposit Insurance Corp. if they downgrade their private rating on the bank, a move that would bar its access to a pair of Federal Reserve lending facilities.
Read more: First Republican Says Will Face Potential Lending Curb at Fed
On the other hand, executives at some big banks are venturing to get more involved in a way that could prevent losses. Some hope that if they wait, they’ll get back at least some of those deposits — and it might be better than if they intervene, potentially throwing good money after bad.
“There’s some nervousness about how Silicon Valley Bank went down, and maybe they want to see if First Republic can fix its problems on its own,” said Stephen Lubben, a professor at Seton Hall University School of Law.
“Perhaps regulators are also concerned that if this doesn’t stop, who will be next?” he said. “That is, who will be next in the First Republic in the hot seat?”
A spokeswoman for First Republic declined to comment.
First Republic’s issues stem from its stockpile of loans at low interest rates, including an unusually large portfolio of jumbo mortgages to wealthy clients. Those loans lost value amid the Federal Reserve’s hike, prompting some depositors to pull their money.
Read more: Interest-Only Loan to Hamptons Set Impale First Republic
After the collapse of Silicon Valley Bank in March raised concerns about the soundness of regional lenders, First Republic was left paying more for financing than it was earning on many of its assets. That means the company faces what analysts predict will be at least a year of losses.
The bank remains fully operational, and executives emphasized in an earnings report on Monday that it has more than enough access to cash to serve clients. However, its leaders have acknowledged that they are looking for strategic options.
The clock for striking such a deal began ticking last week. US regulators have reached out to several industry leaders, encouraging them to make a renewed push to find a private solution to shore up the First Republic’s balance sheet, according to people with knowledge of the discussions.
The calls also came with a warning that banks should prepare in case something happens soon.
Some rescue proposals have so far failed to materialize.
Earlier this week, Bloomberg reported that First Republic was looking to potentially sell $50 billion to $100 billion of assets to big banks that would also receive warrants or preferred equity as an incentive to buy the holdings. above their market value.
By Wednesday, the firm’s advisers were privately pitching a similar concept, in which stronger banks would buy bonds off First Republic’s books for more than they were worth so it could sell shares. to new investors. While that would mean booking upfront losses, banks could handle the loans by paying to build up.
In that scenario, advocates suggested, big banks could save money by ensuring the safety of their $30 billion in deposits and avoiding a special FDIC assessment if the regulator steps in.
But executives at the five biggest banks, speaking on the condition that they not be named, rejected the notion of regrouping to prop up First Republic, especially if it meant making way for investors or a competitor to take over the company at low cost.
One expressed willingness to participate – if only regulators forced the group to act.
Withdrawal of Deposits
Some banks prefer that, if necessary, the FDIC seize First Republic and sell it. Such a resolution, they said, would be cleaner, even if the banks went bankrupt. Some have already taken reserves.
The group of banks accounted for most of First Republic’s $50 billion in uninsured deposits at the end of the first quarter. But, as depositors, they are the frontrunners to recover the money if the First Republic is dissolved. Two executives whose companies contributed $5 billion each in deposits last month said they would expect to get 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 was considered a disaster. The company announced a larger-than-expected drop in deposits, then declined to answer questions as executives presented a 12-minute briefing on the results.
Shares immediately faltered in a dive in late trading that day. In total, they are down 95% this year. They gained 15% in Thursday’s trading at 9:57 am in New York.
Industry executives said it’s possible — regardless of stock — First Republic could continue indefinitely.
And the FDIC showed it was in no rush to seize the firm and take another multibillion-dollar hit to its insurance fund.
For would-be rescuers, the collapse of SVB and Signature Bank last month offered an unfortunate reminder: Bidders sometimes get the best deals by being patient and waiting to take over a bank. or its assets once the agency intervenes.
After those two lenders sold off, those who got their stocks saw the pop.
–With help from Matthew Monks, Sonali Basak, Sridhar Natarajan, Gillian Tan, Max Reyes and Katanga Johnson.
(Trading updates on last screen)
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