First Republic Bank is facing seizure by federal regulators, who are then expected to sell the bank to a larger financial institution, according to two anonymous sources with knowledge of the matter.
First Republic’s inability to adjust to rising interest rates has led to financial troubles for the 14th largest bank in the United States, out of approximately 14,000.
The bank, profitable every year since its founding in 1985 and known for its careful loan underwriting and lucrative wealth management business, has tens of billions of dollars in unrealized losses from securities and loans on its balance sheet, which once had an enterprise value greater than $19 billion.
The US banking system had $620 billion of unrealized losses in the system at the end of 2022 were for available-for-sale and held-to-maturity securities, according to FDIC Chairman Martin Gruenberg.
JPMorgan Chase is the high bidder so far, but other banks may bid for the bank as well.
First Republic is expected to be the third U.S. bank to fail since March 10, when Silicon Valley Bank collapsed, which led to fears of a broader financial crisis. Signature Bank was closed on March 12, 2023, by the New York Department of Financial Services, which appointed the FDIC as receiver.
However, the nation’s banks have been deemed sound by Treasury Secretary Janet L. Yellen and Federal Reserve Chair Jerome H. Powell in recent weeks, with PacWest Bancorp reporting an influx of deposits as a sign of good health.
The FDIC estimates that the two recent failures of Silicon Valley Bank and Signature Bank resulted in losses of approximately $22.5 billion, of which $19.2 billion is attributable to the protection of uninsured depositors under the Systemic Risk Exception.
Federal law requires that any losses to the FDIC’s Deposit Insurance Fund related to this action be repaid by a special assessment on banks. Only the remaining $3.3 billion in losses will directly impact the DIF balance and is not expected to have a material effect on the projected timeline for reaching the statutory minimum reserve ratio.
Nonetheless, the potential seizure of First Republic Bank may have significant ramifications for other midsize banks.
The government’s plan for the bank’s future is unclear, but First Republic’s shareholders will likely be wiped out in the takeover-and-sale.
U.S. regulators have asked banks for their best and final takeover offers for First Republic by Sunday afternoon, in a move that authorities hope will cap a period of uncertainty for regional lenders.
JPMorgan Chase and PNC are likely bidders for the ailing lender, which would be seized in receivership and immediately sold to the winning bank, according to sources.
Bank of America is among several other institutions that are weighing a potential bid for First Republic, according to people with knowledge of the matter.
The bank is attractive to potential owners because of its profitability and wealth management business, but its unrecognized losses from its balance sheet may pose a challenge to potential buyers.
