Seven weeks after a crisis first erupted at a US regional bank, a potential solution to the First Republic’s problems signaled an easing of dire fears of wider financial damage, analysts said.
Under the coming out The Federal Deposit Insurance Corp., the bank’s primary federal regulator, plans to put First Republic into receivership before selling it quickly. As the “receiver” of a failed bank, the FDIC temporarily manages its affairs and seeks to obtain the greatest value possible for its remaining assets.
Regulators have sought bids from interested banks in recent days, with JPMorgan Chase emerging as the highest bidder so far, one of the people said. The country’s largest bank last month led an 11-bank alliance that deposited $30 billion in the First Republic in a show of confidence.
First Republic’s shareholders will be wiped out as a result of the government’s takeover and divestment plan. There will be a first republic Third A US bank has failed since March 10, when the Silicon Valley bank collapsed, sparking fears of a broader financial crisis.
However, since last month’s dramatic events, Treasury Secretary Janet L. Yellen and Federal Reserve Chairman Jerome H. Powell has repeatedly said the nation’s banks are in good shape.
PacWest Bancorp, another regional bank surveyed last month, has seen an influx of deposits in recent weeks, a sign of good health, but that judgment was reinforced earlier this week. Even as the Republic neared collapse from Friday, Index of Regional Bank Shares is high
“At this point, it looks like we’re in pretty bad shape,” said David Smith, banking analyst at Autonomy Research. “This is not the risk of widespread contagion for the banking system that we were all worried about a month ago. This should be the end.
It is unclear whether the government will guarantee all First Republic deposits, including those above the federal limit of $250,000 per account, as it did for the two banks that failed last month. Officials want to discourage the outflow of funds from other mid-sized banks, but they fear the settlement would benefit any Wall Street firm acquiring the troubled bank, the people said.
Despite the current difficulties, First Republic remains attractive to potential owners. The bank has been profitable every year since its inception in 1985 and maintains a profitable wealth management business serving affluent individuals. It is known for careful loan underwriting.
“Reputation is very strong,” said David Chiaverini, an analyst at Wedbush Securities.
First Republic, however, comes with tens of thousands of dollars in unrecognized losses from bonds and loans on its balance sheet. It’s not clear whether the new owner will hold those assets to maturity or receive some other consideration to sweeten the pot.
Talks over the bank’s fate came to an end a day after regulators released a pair of reports that blistered government watchdogs and bank executives over failures last month at two mid-sized firms in California and New York.
“Silicon Valley Bank failed because of a textbook case of bank mismanagement. Its senior leadership failed to manage base interest rate and liquidity risk. Its board of directors failed to supervise and hold senior leadership accountable. “Federal Reserve supervisors have failed to take adequate action,” concluded Michael Barr, the Fed’s vice president for supervision.
A separate FDIC report on the collapse of New York’s Signature Bank accused the bank’s management of ignoring risks — and faulted the agency itself for not pushing executives to improve their operations.
Two bank failures last month spooked investors and sent shockwaves throughout the global financial system. Within days of SVB’s collapse, Credit Suisse, the global conglomerate that first opened its doors in 1856, was absorbed by its Swiss rival UBS.
Investors also grew bullish on the survival of other regional U.S. banks, including First Republic.
First Republic’s shares were in free fall all week. The stock price, which peaked at $147 in early February, started the week at $14 and ended Friday at $3.51.
The central bank says it needs to strengthen banking rules after SVB’s collapse
Like SVB, First Republic placed financial bets during extremely low interest rates, just as the Federal Reserve began raising borrowing costs. Over the past 14 months, the central bank has raised its key lending rate by about 5 percentage points, the fastest in nearly 40 years.
Higher rates have become a money-losing prospect for the San Francisco-based bank.
It earns about 3 percent on its holdings of government bonds and more than $100 billion in residential mortgages. But now the central bank and federal home loan banks have to pay nearly 5 percent on new funds.
So the bank is locked into long-term bets that generate limited returns while having to pay increasing amounts to get new money for its business.
Also, First Republic offered a wealthy customer base, meaning many of its accounts exceeded the federal deposit insurance limit of $250,000 per account. Nearly half of the bank’s $104 billion in deposits are uninsured.
So when the rapid failures of SVB and Signature Bank of New York last month raised concerns about the health of the industry, planned depositors fled the First Republic. Bank executives said earlier this week that they have lost more than $100 billion in deposits in recent weeks.
This is a steep decline for First Republic, which is well-known in the banking sector and has seen rapid growth in recent years. Over the past four years, its total assets have doubled to $212 billion and its workforce has grown from about 4,500 to more than 7,200 employees.
But a combination of low-yielding assets and a large uninsured deposit base left the bank vulnerable, analysts said.
Some other regional banks may also stumble under the pressure of higher interest rates. But unlike the 2008 financial crisis, the country’s biggest banks are less likely to be hit by the ills of the First Republic. Tighter regulations, including the need to hold more capital in reserve to absorb any losses, make them safer today than they were 15 years ago, analysts said.
“This is the last big wobble from the run on all the banks that look like SVPs,” said Steven Kelly, a senior researcher at the Yale Program on Financial Stability. “It’s not the flow of the food chain of banks that are still big.”
Rachel Siegel contributed reporting.
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