We thought that the banking turmoil that occurred in March was behind us and that the banking system was finally stable. The recent drop in First Republic Bank’s stock price shows us that this turmoil is not necessarily over. Federal regulators are likely this weekend to seize First Republic Bank, a once high-flying lender that was humbled by its inability to adjust to rising interest rates, and sell it to a larger financial institution. Under the emerging plan, the Federal Deposit Insurance Corporation (FDIC), the bank’s principal federal regulator, would place First Republic in receivership before quickly selling it. As the receiver of a failed bank, the FDIC temporarily manages its affairs and seeks to obtain the greatest possible for its remaining assets.
JP Morgan Chase and PNC are likely bidders for the ailing lender, which would be seized in receivership and immediately sold to the winning bank. Other companies are likely to step up. Bank America is among several other financial institutions that are weighing a bid for First Republic. If regulators led by the FDIC receive an acceptable offer by Sunday, it is then possible that a First Republic owner could be announced early Monday. That scenario would create the least disruption for First Republic customers, who would start the week knowing their bank was now owned by a financially-stable operator.
First Republic Bank Stock Price
Source: Google Finance
First Republic’s shareholders would be wiped out as a consequence of the government’s takeover-and-sale plan. It is not clear whether the government will guarantee all First Republic deposits, including those above the $ 250,000-per-account federal limit, as it did for the two banks that failed last month. The First Republic auction ends a tumultuous period for midsized U.S. banks. Since the failure of Silicon Valley Bank in March, attention has turned to First Republic as the weakest link in the American banking system. Shares of the bank sank 90% last month and then collapsed further this week after First Republic disclosed how dire its situation is.
While the emergency takeovers of SVB and Signature Bank both involved invoking a systemic risk exception to protect uninsured depositors from losses, that probably won’t be necessary for First Republic Bank’s Receivership. The reason is that the new owner would presumably be able to handle deposit outflows; in the case of SVB’s receivership, it took two full weeks to announce a deal. The big banks will keep getting bigger as the small and mid-size banks are still being weeded out.
First Republic would be the third U.S. bank to fail since March 10, when SVB collapsed, igniting fears of broader financial distress. Since last month’s dramatic events, Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell have repeatedly said the nation’s banks are sound. First Republic Bank is not the last bank to fail. We can, and maybe, should expect more bank failures to occur. The anticipated recession may be triggered by the ongoing banking turmoil.