A First Republic bank branch in Manhattan on April 24, 2023 in New York City.
Spencer Platt | Getty Images
US regulators have asked banks for their best and final takeover bids First Republic by Sunday afternoon, in a move authorities hope will calm markets and limit a period of uncertainty for regional lenders.
JPMorgan Chase And pnc are likely bidders for the troubled lender, which would be declared bankrupt and immediately sold to the winning bank, according to people familiar with the situation. The Wall Street Journal reported interest from these banks late Friday.
Bank of America decided not to make a definitive offer after being involved in previous talks, CNBC has learned, according to other people with knowledge of the situation.
If the FDIC-run regulators get an acceptable offer by Sunday, a new owner of the First Republic could be announced soon. This scenario would mean the least disruption to First Republic customers, who would start the week knowing their bank is now owned by a financially stable operator.
The First Republic auction could end a turbulent period for mid-sized US banks. Since the collapse of Silicon Valley Bank in March, First Republic has been considered the weakest link in the American banking system. The bank’s shares fell 90% last month and then fell further this week after First Republic announced how dire their situation is.
Like SVB, which catered to the tech startup community, First Republic is also a California-based specialty lender. It focused on catering to rich Americans and luring them with low mortgages to leave cash in the bank. That model unraveled after the collapse of SVB, when First Republic customers withdrew more than $100 billion in deposits, the bank announced on Monday.
No systemic risk?
As First Republic’s situation worsened, regulators first cast a wide net, asking a large group of banks what they thought the company was worth, according to a person familiar with the process. That group has slimmed down in recent days, with the idea that regulators would only share the information needed to make a final offer with the most serious of competitors.
Regulators are expected to choose the bid that will cause the FDIC the least financial damage to the First Republic’s solution, according to a person familiar with the situation.
Stock picks and investment trends from CNBC Pro:
The failure of the SVB, for example, will cost the FDIC’s deposit insurance fund about $20 billion, the agency said. The largest banks will bear the brunt of these costs, as member banks are likely to be charged fees to replenish the FDIC fund over several years.
While the emergency takeovers of SVB and Signature both included invoking a systemic risk exemption to protect uninsured depositors from losses, this likely won’t be necessary in the First Republic receivership. Because the new owner would presumably be able to cope with deposit outflows; In the case of SVB’s receivership, it took two full weeks to announce a deal.
The big ones get bigger
The auction means one of the largest US banks is likely to get even bigger, benefiting from a government-brokered bankruptcy process that leaves the FDIC holding unwanted assets.
That’s what happened when SVB was sold to First Citizens last month; The buyer won a number of concessions, including loss sharing agreements. First Citizens’ shares soared 55% on news of the bargain deal.
The likely bidders are all represented in the group of 11 banks that came together last month to invest $30 billion in deposits in First Republic. The move helped stem the larger outflow of deposits from mid-tier banks to the four largest institutions, including JPMorgan and Wells Fargo, giving regulators room to loosen First Republic, CNBC reported last month.
Goldman, Wells Fargo are sitting out
But not every big bank that participated in the deposit injection will make an offer. Wells Fargo, Goldman Sachs And Citigroup are unlikely to make an offer according to people with knowledge of the banks.
Wells Fargo is still operating under a 2018 asset ceiling imposed by the Federal Reserve. Goldman made a strategic decision to move away from retail finance and sell consumer credit. Citigroup has outsourced operations to simplify operations while enhancing its risk controls.
The acquisition makes the most sense for institutions looking to grow among the Coast’s affluent; First Republic’s offices are centered in California, New York, Boston and Florida.
First Republic advisers had hoped to avoid a government takeover by persuading the largest US banks to help again. A recently circulated version of the plan involved requiring banks to pay above-average interest on bonds on First Republic’s balance sheet, which would allow it to raise capital from other sources.
But ultimately, the banks would not bite the last ditch effort, and the government was poised to end the First Republic’s 38-year run.