June 13, 2024

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US officials are leading urgent rescue talks for the First Republic

US officials are leading urgent rescue talks for the First Republic

NEW YORK (Reuters) – U.S. officials are coordinating urgent talks to save First Republic Bank, as private sector efforts led by the bank’s advisers have yet to reach an agreement, three sources familiar with the matter said. .

The sources said that the Federal Deposit Insurance Corporation (FDIC), the Treasury Department and the Federal Reserve are among the government bodies that in recent days have begun to organize meetings with financial firms about working out a solution for the defaulting lender.

One source added that while the government had been in contact with First Republic and its advisers for weeks, its new involvement was helping to bring more parties, including banks and private equity firms, to the negotiating table.

It is unclear if the US government is considering participating in a private sector bailout of First Republic. One source said the government’s involvement has emboldened First Republic executives as they seek an agreement that would avoid a power grab by US regulators.

The First Republic became the epicenter of a regional banking crisis in the US in March after wealthy clients trying to shore up its rapid growth began withdrawing deposits and left the bank reeling.

Two of the sources said US officials view the private sector deal as preferable to First Republic being placed in FDIC receivership.

The sources added that many of the proposed options – including selling assets or creating a “bad bank” that would isolate its assets underwater – have so far failed to reach a deal.

Any solution must come with coverage for losses that First Republic or the bank’s potential acquirer would incur if there was a deal. These losses will arise from the First Republic’s loan book and fixed income portfolio, which will have lower-yielding assets reduced to account for higher interest rates.

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The deal structure that represents the First Republic’s best chance of bailing out is a special purpose vehicle that would carve out some of the lender’s assets for other banks to buy out, two people familiar with the matter said.

Banks have been reluctant to buy these assets at a market discount, one source said, and the First Republic hopes US officials can convince them to participate or provide some kind of government support for the deal.

CNBC reported Friday, citing sources, that government talks are now focused on preparing to place First Republic into FDIC receivership, and that such an outcome was likely. In receivership, the FDIC fund will bear any losses incurred through the takeover of First Republic’s underwater assets. The FDIC would then reimburse those losses from all participating banks in its insurance scheme, to no detriment to American taxpayers.

The sources asked not to be identified because the discussions are confidential.

“We are engaged in discussions with multiple parties about our strategic options while continuing to serve our customers,” First Republic said in a statement.

The Treasury Department, the Federal Reserve and the Federal Insurance Corporation (FDIC) declined to comment.

First Republic shares were trading down 30% to $4.31 on Friday.

Wall Street banks have been trying to find a solution for First Republic since 11 of the largest US lenders deposited $30 billion in the bank on March 16 to stop a regional banking crisis that led to the failure of Silicon Valley and Signature Bank.

Discussions over an urgent deal became fresh this week after First Republic revealed on Monday that it had secured deposit outflows of more than $100 billion in the first quarter. Although the bank said its deposits had stabilized, it disclosed the loss of funds because it had to replace withdrawn deposits with interest-bearing financing from the Federal Reserve.

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One source said First Republic is considering a major hit, even a complete shareholder loss, as part of options that might prevent a takeover by US regulators. First Republic shares have lost 95% of their value since the regional banking crisis began on March 8.

(Reporting by Andrea Shalal in Washington and Nupur Anand in New York; Additional reporting by David French; Editing by Lanan Nguyen, Megan Davies and Jerry Doyle

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