The San Francisco-based First Republic Bank became the new entrant to the banking crisis plaguing the US economy after it was placed under the receivership of the US Federal Deposit Insurance Corporation (FDIC).
It has become the third financial institution to collapse after Silicon Valley Bank and Signature Bank in the last two months.
According to Wall Street Journal, FDIC is all set to take over the First Republic over this weekend and in the process, the lender would be put under the hammer for impending bidding.
It comes after First Republic’s stocks plunged 54 per cent and the trading was halted multiple times for volatility on Friday amid reports that FDIC to rescue the lender. At the end of the day, the bank’s stock closed 43 per cent lower and hit a record low of $2.99 apiece.
Earlier this week, shares of First Republic tanked nearly 50 per cent after its customers pulled more than $100 billion from their accounts amid last month’s banking panic. The bank’s shares have lost 97 per cent of their value so far this year.
Any hopes to rescue the bank fizzled out after Reuters, quoting sources, revealed that US banking regulator determined that First Republic’s situation had worsened to a point where immediate action was necessary.
The FDIC’s anticipated intervention indicates the regulator’s growing concern over the stability of the bank and its ability to meet its financial obligations.
The fall of Silicon Valley Bank and Signature Bank last month started to take a toll on First Republic’s stocks, which started plummeting.
The First Republic, just like the other two lenders, had a high number of uninsured deposits, as concerns mounted over the possibility of clients taking out their money.
About two-thirds of First Republic’s deposits were uninsured, which was far less than the 94 per cent uninsured that Silicon Valley Bank had, but First Republic also had an unusually large 111 per cent loan-to-deposit ratio at the end of last year, according to S&P Global — meaning it loaned out more money than it has in deposits.
Last month, it had more than $70 billion in liquidity apart from additional funds it could raise from the Federal Reserve’s Bank Term Funding Program. But this did not instil any faith in investors and they continued to dump the stock.
First Republic was later downgraded by rating agencies Fitch and S&P, citing risks to its funding and liquidity. They placed it on a negative watch, reflecting low confidence in the bank’s financial strength. This affected stocks further.
According to the S&P 500 report, the bank was the worst performer since the beginning of the year, after the investors sold off most of their shares. However on April 24, the bank in its statement said that it was exploring strategic options following its disclosure that it lost around $100 billion in deposits. But this didn’t stop investors from dumping its stocks.
Why concerns over uninsured deposits?
The Federal Deposit Insurance Corporation (FDIC), the US government body guarantees to protect the money of the depositor if the financial institution they parked their money in collapses.
However, there’s a catch. The FDIC can insure up to $250,000 of deposits that anyone has kept at a federally protected bank. Anything beyond that is not guaranteed to be protected.
SVB had a large uninsured deposit base. As the bank started losing money, it tried to raise cash. This is when its depositors, mostly business customers, who had more than $250,000 stashed in the bank, left and turned to other lenders.
Last month, several large banks had injected $30 billion into the First Republic in combined deposits that included Bank of America Corp, Citigroup Inc., JPMorgan and Wells Fargo & Co.
However, First Republic struggled to find support from larger banks or private equity firms on its proposed move to create a so called “bad bank” or sell assets such as securities and mortgage book.
According to reports, banks were earlier reluctant to invest money to rescue the troubled lender, but now have shown interest to buy it out if it is auctioned.
Several large banks, including JPMorgan Chase & Co. and PNC Financial Services Group Inc., are reportedly interested to bid for purchasing First Republic Bank.
Bloomberg reported that JPMorgan and PNC had been given a Sunday deadline by the FDIC to submit final bids for the ailing bank.
Earlier on Friday, a Reuters report said that the government is brokering a rescue deal for the First Republic, which pushed its shares up as much as 6.6 per cent earlier in the session.
A CNBC report said the FDIC, the Treasury Department and the Federal Reserve are among government bodies that have started to orchestrate meetings with financial companies about a lifeline for the bank.
(With inputs from agencies)
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