(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 huge losses and hoping the other side will do business with the ailing company.
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With the bank’s stock still falling – down 49% on Tuesday and 30% on Wednesday – regulators have so far refrained from intervening. They have been waiting to see if the banks that deposited $30 billion into First Republic last month can strike a deal to ensure the company doesn’t fail and take some of their money with them.
Even senior officials at Federal Deposit Insurance Corp. They have debated whether to lower their own rating of the bank, a move that would limit its access to a pair of federal lending facilities.
Read more: The first republic to reportedly face a potential curb on Fed borrowing
On the flip side, executives at many major banks refuse to get further involved in a way that would lead to losses. Some expect that if they wait, they’ll get at least some of those deposits back—and they might do better than if they stepped in, which might make good money after bad.
“There is some concern about how Silicon Valley’s bank will collapse, and they may want to see if the First Republic can solve its problems on its own,” said Stephen Lubin, a professor at Seton Hall University School of Law.
“Regulators are probably worried that if this doesn’t stop, who’s next?” He said. “That is, who comes after First Republic in the hot seat?”
A First Republic spokesperson declined to comment.
First Republic issues stem from its stock of low-interest loans, including an unusually large portfolio of outsized mortgages for wealthy clients. Those debts lost value amid the Fed’s increases, prompting some depositors to withdraw their money.
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After the collapse of a Silicon Valley bank in March raised concerns about the safety of regional lenders, the First Republic was left paying more for financing than it earned on many of its assets. That means the company is facing what analysts expect will be at least a year of losses.
The bank remains fully operational, and executives emphasized in an earnings report Monday that it has more than ample access to cash to serve customers. However, its leaders acknowledged that they are looking at strategic options.
The clock for such a deal began ticking louder late last week. US regulators have reached out to some industry leaders, encouraging them to make a renewed push for a private solution to prop up First Republic’s balance sheet, according to people familiar with the discussions.
The calls also came with a warning that banks should be prepared in case something happens soon.
Proposed deals
A number of rescue proposals have so far failed to come to fruition.
Earlier this week, Bloomberg reported that First Republic was looking to sell $50 billion to $100 billion in assets to major banks who would also receive collateral or preferred equity as an incentive to buy properties above their market value.
By Wednesday, the company’s advisors were privately pitching a similar concept, in which the most powerful banks buy bonds off First Republic’s books for more than they’re worth so they can sell shares to new investors. While this means booking initial losses, banks can keep the debt by making full payments.
In this scenario, proponents have suggested that the big banks might save money by ensuring the safety of their $30 billion in deposits and avoid the FDIC’s own assessment if the regulator were to intervene.
But executives at five of the largest banks, who spoke on condition of anonymity, dismissed the idea of banding together again to support First Republic, especially when it meant paving the way for investors or competitors to take the company on board. Competitive price.
One of them expressed a desire to participate – only if the organizers force the group to take action.
Deposit recovery
Many banks would prefer that, if it became necessary, the FDIC would take over and sell First Republic. They said such a decision would be cleaner even if the banks lose money. Some have already taken reserves.
The banking group accounted for most of First Republic’s $50 billion in uninsured deposits at the end of the first quarter. But, as depositors, they’ll be at the front of the line to get a refund if First Republic dissolves. Two of the executives, whose companies contributed $5 billion in deposits last month, said they expect to recoup at least some — but not all — of that money in a worst-case scenario.
Across the industry, First Republic’s quarterly earnings report on Monday came to be seen as a disaster. The company reported a larger-than-expected drop in deposits, then declined to respond to questions as executives gave a 12-minute briefing on the results.
Stocks quickly turned lower in late trading that day. Altogether, they’re down 95% this year. They gained 15% in Thursday trading at 12:26 PM in New York.
press forward
Industry executives said it’s possible — no matter what the stock — that First Republic could squeeze indefinitely.
And the FDIC has shown that it is in no rush to take over the company and deal another multibillion-dollar blow to its insurance fund.
The apparent deadlock comes just weeks after US Treasury Secretary Janet Yellen announced the $30 billion infusion she helped engineer with JPMorgan Chase & Co CEO Jamie Dimon as a show of support for the financial system. At the time, most of the major U.S. banks were willing to show interest in getting involved, as those efforts indicated in recent earnings reports, with Dimon saying they all “did the right thing.”
For would-be rescuers, the collapse of SVB and Signature Bank last month provided an unfortunate reminder: Bidders can sometimes score the most lucrative deal by being patient and waiting to acquire a bank or its assets once the agency steps in.
After selling off these two lenders, both acquirers saw their shares explode.
– With assistance from Matthew Monks, Sonali Basak, Sridhar Natarajan, Gillian Tan, Max Reyes and Katanga Johnson.
(Updates with the context of the bank bailout, trading in the last screen.)
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