First Republic shares continue slide with no deal in sight

Shares in First Republic dropped almost 30 per cent on Wednesday as regulators, big banks and potential bidders for its assets all held back from stepping in to help the San Francisco-based lender.

Recriminations have started to fly in private as First Republic’s frantic efforts to sell assets to close the hole in its balance sheet have failed to come to fruition.

Government officials are holding back to give time for a private-sector solution to materialise, people close to the situation said, while the big banks are reluctant to take either short-term losses on asset purchases or the long-term headache of dealing with First Republic’s issues.

First Republic has been under pressure from deposit outflows since queues formed outside one of its branches the day after Silicon Valley Bank collapsed in March.

Much of its substantial mortgage loan book has lost value as interest rates have risen and its wealthy customers feared that their large balances would not be covered by deposit insurance if the bank had to be rescued by the Federal Deposit Insurance Corporation.

The bank’s shares have fallen 95 per cent this year. They briefly stabilised in late March after 11 big banks gave it $30bn in deposits but resumed their decline this week after First Republic revealed customers had pulled out more than $100bn in deposits during the banking turmoil and said profits had tumbled by a third year on year.

One potential bidder for the assets said an ordinary sale was unlikely because it would have to take place at such a large discount to book value that it would worsen First Republic’s losses.

As a result, a proposal has been floated to have big US banks buy assets from First Republic at above-market rates. While the banks would take small losses, they would avoid the much larger FDIC fees that would ultimately be imposed on them if the bank fails and has to be rescued.

“This is a potential path but with no assurance at all it gets done,” said a person with direct knowledge of the conversations.

But he and a second person said the banks were unwilling to take losses unless government officials either twisted their arms or offered inducements.

However, officials at the FDIC and Federal Reserve have held back from convening formal discussions or strongly pushing a plan.

The FDIC declined to comment.

First Republic executives are seeking what they are calling an “open-bank” solution, essentially an asset sale that allows it to keep operating, said people close to the lender.

But they worry that some big banks and potential buyers think they would do better from a “closed-bank” deal, meaning one that happens after an FDIC takeover of the bank has taken place.

As a result, First Republic executives believe some big banks are painting a bleaker picture of their prospects than is appropriate, said people close to the lender.