(Bloomberg) – The fate of First Republic Bank has become a game of chicken between the US government and the lender’s biggest rivals, with both sides seeking to avoid heavy losses and hoping the other will save the struggling business .
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As the bank’s shares continue to slide – falling 49% on Tuesday and 30% on Wednesday – regulators have so far refrained from intervening. They are betting the banks that deposited $30 billion in the First Republic last month can strike a deal to ensure the company doesn’t fail and take some of its money with it.
Senior officials from the Federal Deposit Insurance Corp. even discussed whether to lower their private valuation of the bank, a move that would limit its access to a pair of Federal Reserve lending facilities.
Read more: First Republic set to face potential Fed borrowing restriction
On the other side, the executives of several major banks are reluctant to get even more involved in a way that would lock in losses. Some expect that if they wait, they will recover at least some of those deposits – and could fare even better than if they stepped in, potentially throwing money after the harm.
“There is some nervousness about the fall of Silicon Valley Bank, and maybe they would like to see if First Republic can solve its problems on its own,” said Seton Hall University School professor Stephen Lubben. of Law.
“Regulators are probably also concerned that if this doesn’t stop, who will be next?” he said. “That is, who comes after the First Republic in the hot seat?”
A spokesman for the First Republic declined to comment.
The First Republic’s problems stem from its stock of loans at low interest rates, including an unusually large portfolio of giant mortgage loans to wealthy customers. These debts have fallen in value amid hikes by the Federal Reserve, prompting some depositors to withdraw their money.
Read more: Interest-only loans to the Hamptons impale the First Republic
After the collapse of Silicon Valley Bank in March stoked concerns about the strength of regional lenders, First Republic found itself paying more for financing than it earns on many of its assets. That means the company is facing what analysts predict will be at least a year of losses.
The bank remains fully operational, and executives stressed in an earnings report on Monday that it has more than enough access to cash to serve its customers. Yet its leaders have acknowledged that they are looking for strategic options.
The clock to strike such a deal started ticking harder at the end of last week. U.S. regulators have reached out to some industry leaders, encouraging them to step up efforts to find a private solution to shore up the First Republic’s balance sheet, according to people familiar with the talks.
The calls also come with a warning that banks need to be prepared in case something happens soon.
Proposed offers
A number of rescue proposals have so far failed.
Earlier this week, Bloomberg reported that First Republic was looking to potentially sell $50 billion to $100 billion in assets to major banks that would also receive warrants or preferred stock as an incentive to buy the holdings above their market value.
On Wednesday, the company’s advisers were privately proposing a similar concept, in which stronger banks would buy bonds from the First Republic’s books for more than they were worth so it could sell shares to new investors. Although this would involve accounting for initial losses, banks could retain debts by redemption to be repaid.
In this scenario, proponents suggested, the big banks could save money by securing their $30 billion in deposits and avoiding a special FDIC assessment if the regulator were to intervene.
But the leaders of five of the biggest banks, speaking on condition that they are not named, rejected the idea of banding together again in support of the First Republic, especially when it could mean paving the way for investors or a competitor to recover the business. at a favorable price.
One expressed a willingness to participate – only if regulators forced the group to act.
Recovery of deposits
Several banks would prefer that, if it became necessary, the FDIC would seize the First Republic and sell it. Such a resolution, they said, would be cleaner, even if the banks lost money. Some have already taken reservations.
The group of banks accounted for the bulk of First Republic’s $50 billion in uninsured deposits at the end of the first quarter. But, as depositors, they would be on the front lines of recovering money if the First Republic was resolved. Two executives whose companies paid out $5 billion each in deposits last month said they would expect to recover at least some — but not all — of that money in the worst-case scenario.
Across the industry, First Republic’s quarterly earnings report released on Monday turned into a disaster. The company announced a bigger-than-expected decline in filings, then declined to take questions as executives gave a 12-minute earnings briefing.
Stocks quickly tipped into a late-trading dive that day. In total, they are down 95% this year.
Industry executives have said it’s possible that regardless of the stock, First Republic could continue indefinitely.
And the FDIC showed it was in no rush to seize the company and deliver another multibillion-dollar blow to its insurance fund.
For would-be rescuers, the collapse of SVB and Signature Bank last month offered an unfortunate reminder that bidders can sometimes land the most lucrative deal by being patient and waiting to recover a bank or its assets once the agency intervenes.
After the sale of these two lenders, the two acquirers saw their shares explode.
–With assists from Matthew Monks, Sonali Basak, Sridhar Natarajan, Gillian Tan, Max Reyes and Katanga Johnson.
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