US regulators are racing to secure the sale of California bank First Republic, which is on course to become the third American lender to fail this year, a sequence of collapses that has drawn uncomfortable parallels with the 2008 global financial crisis.
Half a dozen US banks are in the running to take over stricken First Republic, according to reports over the weekend, with leading bidders including JPMorgan Chase, Citizens Financial and PNC Financial Services.
The Federal Deposit Insurance Corp (FDIC), based in Washington DC, is running the auction process and has set a deadline of the end of last week for potential buyers to submit nonbinding offers.
Suitors were on Sunday weighing up which of First Republic’s assets they want to buy before making final bids, according to reports, raising hopes that a deal could be sealed on Sunday night, averting market instability when Asian markets open.
Any deal would come less than two months after Silicon Valley Bank (SVB) and Signature Bank both failed, as investors withdrew funds en masse, forcing the Federal Reserve to step in with emergency measures.
Should state-funded financial support be required to get the deal over the line, it would need approval from the Treasury secretary, the president and supermajorities of the boards of the Federal Reserve and the FDIC.
On Friday, trading in First Republic was briefly halted after its share price plunged close to 50%, the second such fall in a week. Its market value touched a low of $557m, down from its peak of $4bn in November 2021.
Days earlier, the bank revealed it had lost $100bn in deposits during last month’s banking crisis, as depositors responded to the collapse of Signature and SVB by pulling cash from weaker lenders.
Although the rate of withdrawals has slowed at many banks, First Republic, which specialises in high net worth individuals, appears to be in peril despite receiving a $30bn infusion of deposits from 11 major Wall Street banks in March.
With time running out to secure a private sale, the FDIC invited some of the largest American banks to submit bids to rescue First Republic, which is based in San Francisco.
JP Morgan already holds more than 10% of all US bank deposits and would need a special government waiver to add more.
“For a large bank to buy all or most of the bank could be healthier for First Republic customers because it could put them on a broader and more stable platform,” said Eugene Flood, managing partner and board chair of A Cappella Partners, who serves as an independent director at First Citizens Bancshares and Janus Henderson. He was speaking in a personal capacity. First Citizens agreed to buy failed SVB last month.
On Friday, it was thought the FDIC was preparing to place First Republic under receivership before securing depositors’ funds. Without an agreed bid, receivership is thought to still be an option.
The Federal Reserve has admitted in a report that it was slow to consider the strain on the banks from a sharp increase in interest rates, which has lowered the value of their financial assets even though it has increased their profitability.
The mismatch has caused panic and a flight of funds to safe haven financial institutions.
US central bank officials have also blamed reforms during the presidency of Donald Trump, which had the effect of watering down the oversight of mid-sized banks such as SVB and First Republic.
Michael Barr, the Federal Reserve’s vice-chair for supervision, who led the review, said the US central bank needed to toughen its rules after the collapse of SVB.
“Federal Reserve supervisors failed to take forceful enough action,” he said, highlighting regulatory standards that were “too low”, a system of supervision that lacked urgency, and risks to the wider banking system resulting from the light regulation of mid-sized banks.
“Following SVB’s failure, we must strengthen the Federal Reserve’s supervision and regulation,” he said.