First Republic shares plunged nearly 50% on Friday as the troubled California bank prepared to end another week of turmoil with no long-term plan for its survival.
First Republic and his advisers have been working on a private sector solution that would prevent the bank from being taken over by the Federal Deposit Insurance Corporation, according to people briefed on the matter.
But so far they have failed to craft a proposal that would win over both major US banks and government officials.
The bank’s shares were halted on volatility as investors lost faith that what First Republic advisers call an “open banking” solution was about to materialize. If it goes into receivership, shareholders will almost certainly be wiped out.
First Republic said in a statement that it was “engaged in discussions with multiple parties about our strategic options while continuing to serve our customers.”
The Biden administration is keen to avoid another FDIC takeover following the March 10 collapse of Silicon Valley Bank due to contagion fears. It would also once again raise the politically thorny question of what to do with depositors whose balances exceed the $250,000 threshold covered by deposit insurance.
A First Republic resolution could also be problematic as its remaining uninsured deposits include 30 billion dollars that have been injected by 11 of the largest US lenders in an earlier effort to stabilize it.
The San Francisco-based lender revealed on Monday that it had suffered more than $100 billion in deposit outflows in the first quarter as it reported plummeting profits. It also faces further hits to its profitability as rising interest rates have hammered the paper value of its mortgage portfolio and other assets. Its shares have already fallen 97% this year.
A private sector proposal that has been floated would be for a group of banks and possibly other financial firms to purchase some of the First Republic’s long-lived assets at prices above their current market value. This would erase some of its losses and buyers could avoid taking a hit themselves by holding the assets until maturity.
But the big banks are reluctant to take additional risks under the First Republic, citing their duty to their own shareholders.
Much of the debate centered on whether the U.S. government would be willing to provide some kind of sweetener to potential acquirers of all or part of the First Republic.
The FDIC and Federal Reserve declined to comment.
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