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U.S. regulators are trying to clinch a sale of First Republic Bank over the weekend, with roughly half a dozen banks bidding, sources said on Saturday, in what is likely to be the third major U.S. bank to fail in two months.

Citizens Financial Group Inc., PNC Financial Services Group and JPMorgan Chase & Co. are among bidders vying for First Republic in an auction process being run by the Federal Deposit Insurance Corp, according to sources familiar with the matter. US Bancorp was also among banks the FDIC had asked to submit a bid, according to Bloomberg.

Guggenheim Securities is advising the FDIC, two sources familiar with the matter said.

The FDIC process kicked off this week, three of the sources said. The bidders were asked to give nonbinding offers by Friday and were studying First Republic’s books over the weekend, one of the sources said.

A deal is expected to be announced on Sunday night before Asian markets open, with the regulator likely to say at the same time that it had seized the lender, three of the sources said. Bids are due by Sunday noon, one of the sources said.

Currently, the interested banks are evaluating options to see what they would like to bid for, one of the sources said, adding that it is likely that lenders will bid for all of FRC’s deposits, a sizable chunk of its assets and some of its liabilities.

US Bancorp did not immediately respond to a request for comment. First Republic, the FDIC, Guggenheim and the other banks declined to comment.

Difficult deal

A deal for First Republic would come less than two months after Silicon Valley Bank and Signature Bank failed amid a deposit flight from U.S. lenders, forcing the Federal Reserve to step in with emergency measures to stabilize markets.

While markets have since calmed, a deal for First Republic would be closely watched for the amount of support the government has to provide.

The FDIC officially insures deposits up to $250,000. But fearing further bank runs, regulators took the exceptional step of insuring all deposits at both Silicon Valley Bank and Signature.

It remains to be seen whether regulators would have to do so at First Republic as well. They would need approval by the Treasury secretary, the president and super-majorities of the boards of the Federal Reserve and the FDIC.

In trying to find a buyer before closing the bank, the FDIC is turning to some of the largest U.S. lenders. Large banks had been encouraged to bid for FRC’s assets, one of the sources said.

JPMorgan already holds more than 10% of the nation’s total 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, president of A Cappella Partners, who serves as an independent director at First Citizens BancShares and Janus Henderson and was speaking in a personal capacity. First Citizens agreed to buy failed Silicon Valley Bank last month.

Stunning fall

First Republic was founded in 1985 by James “Jim” Herbert, son of a community banker in Ohio. Merrill Lynch acquired the bank in 2007, but it was listed in the stock market again in 2010 after being sold by Merrill’s new owner, Bank of America Corp., following the 2008 financial crisis.

For years, First Republic lured high-net-worth customers with preferential rates on mortgages and loans. This strategy made it more vulnerable than regional lenders with less-affluent customers. The bank had a high level of uninsured deposits, amounting to 68% of deposits.

The San Francisco-based lender saw more than $100 billion in deposits fleeing in the first quarter, leaving it scrambling to raise money.

Despite an initial $30 billion lifeline from 11 Wall Street banks in March, the efforts proved futile, in part because buyers balked at the prospect of having to realize large losses on its loan book.

A source familiar with the situation told Reuters on Friday, that the FDIC decided the lender’s position had deteriorated and there was no more time to pursue a rescue through the private sector.

By Friday, First Republic’s market value had hit a low of $557 million, down from its peak of $40 billion in November 2021.

Shares of some other regional banks also fell on Friday, as it became clear that First Republic was headed for an FDIC receivership, with PacWest Bancorp down 2% after the bell and Western Alliance down 0.7%.
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The Federal Reserve blamed last month’s collapse of Silicon Valley Bank on poor management, watered-down regulations and lax oversight by its own staffers, and it said the industry needs stricter policing on multiple fronts to prevent future bank failures. 

The Fed was highly critical of its own role in the bank’s failure in a report released Friday. The report, compiled by Michael Barr, the Fed’s top regulator, said bank supervisors were slow to recognize blossoming problems at Silicon Valley Bank as it quickly grew in size in the years leading up to its collapse. The report also pointed out underlying cultural issues at the Fed, where supervisors were unwilling to be hard on bank management when they saw growing problems. 

Those cultural issues stemmed from legislation passed in 2018 that sought to lighten regulation for banks with less than $250 billion in assets, the report concluded. The Fed also weakened its own rules the following year, which exempted banks below that threshold from stress tests and other regulations. Both Silicon Valley Bank and New York-based Signature Bank, which also failed last month, had assets below that level. 

The changes increased the burden on regulators to justify the need for supervisory action, the report said. “In some cases, the changes also led to slower action by supervisory staff and a reluctance to escalate issues.” 

Separate reports also released Friday by the Federal Deposit Insurance Corp. and the Government Accountability Office, the investigative arm of Congress, also faulted the Fed and other regulators for a lack of urgency regarding Silicon Valley’s deficiencies. About 95% of the bank’s deposits exceeded the FDIC’s insurance cap and the deposits were concentrated in the technology industry, making the bank vulnerable to a panic. 

The Fed also said it planned to reexamine how it regulates larger regional banks such as Silicon Valley Bank, which had more than $200 billion in assets when it failed, although less than the $250 billion threshold for greater regulation. 

“While higher supervisory and regulatory requirements may not have prevented the firm’s failure, they would likely have bolstered the resilience of Silicon Valley Bank,” the report said. 

Tighter regulation seen

Banking policy analysts said the trio of critical reports made it more likely regulation would be tightened, though the Fed acknowledged it could take years for proposals to be implemented. 

The reports “provide a clear path for a tougher and more costly regulatory regime for banks with at least $100 billion of assets,” said Jaret Seiberg, an analyst at TD Cowen. “We would expect the Fed to advance proposals in the coming months.” 

Alexa Philo, a former bank examiner for the Federal Reserve Bank of New York and senior policy analyst at Americans for Financial Reform, said the Fed could adopt stricter rules on its own, without relying on Congress. 

“It is long past time to roll back the dangerous deregulation under the last administration to the greatest extent possible and pay close attention to the largest banks so this crisis does not worsen,” she said. 

The Fed also criticized Silicon Valley Bank for tying executive compensation too closely to short-term profits and the company’s stock price. From 2018 to 2021, profit at SVB Financial, Silicon Valley Bank’s parent, doubled and the stock nearly tripled. 

The report also pointed out that there were no pay incentives at the bank tied to risk management. Silicon Valley Bank notably had no chief risk officer at the firm for roughly a year, during a time when the bank was growing quickly. 

The Fed’s report, which included the release of internal reports and Fed communications, is a rare look into how the central bank supervises individual banks as one of the nation’s bank regulators. Typically, such processes are rarely seen by the public, but the Fed chose to release these reports to show how the bank was managed up to its failure. 

Bartlett Collins Naylor, financial policy advocate at Congress Watch, a division of Public Citizen, was surprised at the degree to which the Fed blamed itself for the bank failure. 

“I don’t know that I expected the Fed to say ‘mea culpa’ — but I find that adds a lot of credibility” to Federal Reserve leadership, Naylor said. 

Silicon Valley Bank was the go-to bank for venture capital firms and technology startups for years, but failed spectacularly in March, setting off a crisis of confidence for the banking industry. Federal regulators seized Silicon Valley Bank on March 10 after customers withdrew tens of billions of dollars in deposits in a matter of hours. 

Two days later, they seized Signature Bank. Although regulators guaranteed all the banks’ deposits, customers at other midsize regional banks rushed to pull out their money — often with a few taps on a mobile device — and move it to the perceived safety of big money center banks such as JPMorgan Chase.

Although the withdrawals have abated at many banks, First Republic Bank in San Francisco appears to be in peril, even after receiving a $30 billion infusion of deposits from 11 major banks in March. The bank’s shares plunged 70% this week after it revealed the extent to which customers pulled their deposits in the days after Silicon Valley Bank failed.
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