Deadline for banks to submit First Republic bids looms as FDIC rushes to fix crisis and avoid receivership

The FDIC prefers not to own First Republic Bank. Justin Sullivan—Getty Images

U.S. regulators rushed to resolve the First Republic Bank crisis on Sunday after the deadline for final takeover bids for the troubled lender passed.

Federal Deposit Insurance Corp. has asked banks including JPMorgan Chase & Co., PNC Financial Services Group Inc. and Citizens Financial Group Inc., to submit bids, according to people familiar with the matter. Bank of America Corp. and US Bancorp were also invited but decided not to bid, according to the people, who requested anonymity to discuss confidential conversations.

If no settlement is reached, regulators will have the option to seize First Republic and take ownership of the bank.

Spokesmen for JPMorgan, PNC, Citizens Financial, US Bancorp, Bank of America and the FDIC declined to comment.

The bidding process launched by regulators — after weeks of fruitless talks between the banks and their advisers — could pave the way for a cleaner sale of First Republic than the protracted auctions that followed the failures of Silicon Valley Bank and Signature Bank last month. The authorities are stepping in after a particularly sharp drop in the company’s shares over the past week, which are now down 97% this year.

Unclear to some involved in the process is whether regulators may use a bid for the so-called open bank solution, which avoids First Republic being formally declared a failure and seized.

The stock’s decline — leaving the company with a market value of $650 million — made such a takeover at least a little more feasible.

Jumbo mortgages

But finances aren’t the only obstacle to closing a deal.

JPMorgan is among a small number of giant banks that have already amassed more than 10 percent of deposits nationwide, making the firm ineligible under U.S. regulations to acquire another deposit-taking institution. Authorities would have to make an exception to allow the country’s biggest bank to grow even bigger.

As of Friday evening, the FDIC still had not made a decision to place First Republic under receivership, people with direct knowledge of the matter said. Representatives for California’s banking regulator, which will take the lead in declaring whether the San Francisco-based lender has failed, did not respond to requests for comment.

First Republic’s balance sheet weighed down a mountain of low-interest loans, including an unusually large portfolio of huge mortgages for wealthy clients. Such debts have lost value amid rising interest rates, leaving the firm facing losses if forced to sell them.

During last month’s regional banking crisis, wealthy clients and businesses pulled their money out of banks with similar deficiencies on their balance sheets. In response, the Federal Reserve opened an emergency lending facility to give banks a way to borrow against some of their holdings to meet any cash requirements.

Waiting for help

A group of 11 banks that deposited $30 billion into the First Republic in March – giving it time to find a private sector solution – have been reluctant to come together to make a joint investment. Several proposals that have emerged in recent days have called for a consortium of stronger banks to buy First Republic assets for more than their market value. But no agreement was reached.

Instead, some stronger firms are waiting for the government to offer a bailout or put the bank into receivership, a solution they see as cleaner — and potentially ending in selling the bank or parts of it at attractive prices.

But receivership is an outcome the FDIC would prefer to avoid, in part because of the prospect of taking a multibillion-dollar hit to its own deposit guarantee fund. The agency already plans to impose a special assessment on the industry to cover the costs of the bankruptcies of SVB and Signature Bank last month.

– With help from Lydia Beyud and Max Reyes.

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