The Federal Deposit Insurance Corporation (FDIC) is reportedly reaching out to banks to gauge their interest in acquiring First Republic (FRC), signalling that regulators may soon seize the San Francisco-based lender. The FDIC is approaching the same banks that provided assistance to First Republic in March with $30 billion in uninsured deposits. However, these banks are hesitant to offer another rescue, fearing that First Republic will be seized regardless. The aim is for another entity to acquire First Republic swiftly and minimize market disruption.
The Wall Street Journal reported that both JPMorgan Chase (JPM) and PNC (PNC) are competing to purchase First Republic following a government takeover. JPMorgan is the largest bank in the United States, while PNC ranks sixth.
Additional reports from Reuters and CNBC suggest that the FDIC is likely to place First Republic into receivership. The FDIC occasionally initiates a marketing process for banks that appear to be at risk of failure, often well in advance of an actual seizure, and bidding can occur without resulting in a failure.
The FDIC may find a buyer among major banks willing to assume all of First Republic's deposits and potentially some of its troubled assets. In some cases, the FDIC can sweeten these deals by sharing future losses on loan portfolios, for instance.
The First Republic faced significant challenges to its survival in March when concerns about the stability of regional lenders spread across the country. It attempted to weather the storm by borrowing from the Federal Reserve and the Federal Home Loan Bank, as well as accepting $30 billion in uninsured deposits from 11 of the largest banks in the country, with JPMorgan contributing $5 billion. However, the situation took a turn for the worse when the First Republic disclosed a loss of over $100 billion in deposits, exceeding expectations and raising doubts about its viability.
The bank's stock plummeted, experiencing a 97% decline for the year, with its market value falling to just $640 million from $40 billion. First Republic's struggles were exacerbated by its difficulty adapting to the Federal Reserve's campaign to raise interest rates, resulting in unrealized losses and the departure of investors and depositors. Additionally, the bank had numerous uninsured depositors, making them more prone to withdraw funds during the March chaos.
The First Republic formulated a turnaround plan, aiming to increase insured deposits, reduce borrowings, decrease loan balances, and reduce its workforce by 20-25%. Although borrowing levels decreased and deposit outflows slowed, the disclosure of the magnitude of deposit losses in March, coupled with the company's decision not to entertain analyst questions, unsettled investors. Short sellers also intensified pressure on the bank, leading to significant profits from bets against the First Republic.
Overall, the FDIC's actions suggest an imminent takeover of First Republic, while potential buyers vie for the opportunity to acquire the troubled institution and stabilize the market.
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