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First Republic nears federal seizure as FDIC seeks buyers

Federal regulators scrambled Saturday to seize and sell troubled First Republic Bank before financial markets opened Monday, according to several people with knowledge of the matter, in an effort to end a banking crisis that began last month with the collapse of Silicon Valley Bank.

The effort, led by the Federal Deposit Insurance Corporation, comes after First Republic’s shares fell 75 percent since Monday, when the bank revealed that customers had withdrawn more than half of their deposits. It became clear last week that no one was willing to ride First Republic’s bailout before a government seizure because bigger banks were worried that buying the company would leave them with billions of dollars in losses.

The FDIC has been talking to banks that include JPMorgan Chase, PNC Financial Services and Bank of America about a potential deal, three of the people said. A deal could be announced as soon as Sunday, these people said, warning that the situation was rapidly evolving and could still change. Any buyer would most likely assume the deposits of First Republic, eliminating the need for a government guarantee on deposits above $250,000 – the deposit insurance limit.

It is possible that a deal will not be reached, in which case the FDIC will have to decide whether it will take First Republic anyway and take ownership itself. If so, federal officials could invoke a systemic risk exemption to protect the larger deposits, which they did after the failures of Silicon Valley Bank and Signature Bank in March.

The banking regulator began looking for potential buyers late last week when it became clear there were few options outside of a government takeover, one of the people said. By Friday, the FDIC asked potential bidders to submit binding offers by Sunday, this person said. Those potential bidders have been given access to detailed information about First Republic’s finances, one of the people said.

The people requested anonymity because the process is confidential. Bloomberg and The Wall Street Journal previously reported the talks. The FDIC declined to comment. The FDIC is working with financial advisory firm Guggenheim Partners on the process, according to three people with knowledge of the situation.

Regulations prevent JPMorgan Chase and Bank of America from buying another depository bank because of their size, and regulators would have to grant an exemption if one of those banks were to buy First Republic.

Progressive Democrats weren’t thrilled to have JPMorgan or Bank of America take over the bank, given that such a deal would make the already huge institutions bigger, and that likely tilted things slightly toward PNC, another person familiar with the situation said. Some other smaller regional banks also showed some interest in First Republic, this person said.

JPMorgan Chase, PNC and Bank of America were part of a consortium of 11 major banks that temporarily deposited $30 billion in First Republic last month as part of an industry effort to prop up the bank. But that lifeline did little to calm concerns about First Republic’s viability.

First Republic, which is based in San Francisco and has most of its branches on the coast where it serves wealthy clients who work in industries such as technology and finance, has been considered the most vulnerable regional bank since the banking crisis began to unfold in March with sudden collapse of Silicon Valley Bank. First Republic spooked investors and customers again by revealing on Monday that it had lost $102 billion in customer deposits, much of it in just three weeks in March, not including $30 billion in deposits it received from the Big 11 banks. The outflow was well over half of the 176 billion dollars it had at the end of last year.

Like Silicon Valley Bank, First Republic has also suffered losses on its loans and investments as the Federal Reserve quickly raised interest rates to fight inflation.

First Republic had hoped to reach a deal before being put into FDIC competition, because a government seizure would mean that the company’s shareholders and some of its bondholders would likely lose all or most of their investments. As of Thursday night, the bank and its advisers remained in talks with the government, some banks and private equity firms about a potential deal. But neither the government nor the banks were ultimately interested in such an arrangement, one of the people said.

By Friday morning, it was clear to everyone involved that First Republic had no choice but a government takeover, the people said. First Republic’s stock closed Friday down another 43 percent and continued to fall in extended trading.

First Republic was worth just $650 million as of Friday afternoon, down from more than $20 billion before the crisis in March, a reflection of investors’ realization that shareholders could be wiped out.

A sale to a larger bank would likely mean that all of First Republic’s deposits would be protected as they would become accounts at the acquiring bank. That includes uninsured deposits, which stood at $50 billion at the end of March — a sum that includes $30 billion from the 11 big banks.

By trying to line up a buyer for First Republic before formally putting the bank into bankruptcy, regulators appear to be hoping to avoid the tumult that marked the fall of Silicon Valley Bank. It took weeks for government officials to sell that bank’s remnants to First Citizens BancShares, in a deal that included about $72 billion in loans at a deeply discounted price.

And the government appeared to learn from the fall of Silicon Valley Bank in another way: The information it provided about First Republic’s financial situation to potential buyers was much more detailed than it provided in the case of Silicon Valley Bank, according to one of the people. Government officials spent extra time compiling a cleaner set of facts mapping the bank’s conditions and risks.

The government prefers to find a buyer for a failed bank as quickly as possible to minimize losses to the government’s deposit insurance fund. The longer it takes to find a buyer, the more likely customers and employees will abandon a failing bank, leaving behind a rapidly withering business.

PNC, one of the nation’s largest regional banks based in Pittsburgh, had previously considered buying First Republic. But PNC couldn’t make a deal work because it had to take big losses from First Republic’s relatively low-interest mortgages and other loans, according to one of the people. The challenges of accounting for First Republic’s loans also scared off other potential buyers.

JPMorgan CEO Jamie Dimon was a key architect of the plan to inject $30 billion into First Republic Bank. During the 2008 financial crisis, Mr. Dimon led the rescue of two banks – Bear Stearns and Washington Mutual.

Jeanna Smialek contributed reporting.

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