FDIC gets ready to place First Republic Bank under receivership

The US Federal Deposit Insurance Corporation (FDIC) is preparing to place First Republic Bank under receivership. Reports on this development sent FRC’s shares tumbling, dropping by over 43% on Friday.

FDIC could place First Republic Bank under receivership

The FDIC published a report saying that the position of FRC had significantly deteriorated, and there was no room to pursue a rescue through the private sector. Some of the largest US lenders, such as JPMorgan Chase and PNC Financial Services Group, are already vying to purchase FRC after its seizure by the government.

If FRC is placed under receivership, it will become the third bank in the US that has collapsed since March. The San Francisco-based bank said its deposits had declined by over $100 billion in Q1 2023.

The bank’s shares closed trading with a 43% decline, which has worsened the plunge that has seen 75% of the stock’s value being wiped out this week. The stock lost over half its value on Friday, dropping to an all-time low of $2.99.

FRC had a market capitalization of nearly $557 million at its record low levels, a notable drop from the peak valuation of over $40 billion in November 2021. The shares of some regional banks also dropped on Friday. PacWest Bancorp dropped 2% after the bell, while Western Alliance dropped by 0.7%.

The FDIC, Treasury Department, and the Federal Reserve are among the government agencies that held meetings with financial companies regarding the financial position of FRC and extending a lifeline.

Inadequacies in bank regulations

The reports of FRC being placed under receivership come as the Federal Reserve and the FDIC said that supervisory lapses before the deposit runs triggered the demise of Silicon Valley Bank and Signature Bank in March this year.

The inadequacies in the assessment conducted by the Fed to detect issues and offer solutions for SVB came with a promise of tougher supervision and strict rules for the banking industry.

Some of the largest banks in the US had already extended a lifeline for First Republic and placed $30 billion in combined deposits from some of the top US banks, such as Bank of America, Citigroup, JPMorgan, and Wells Fargo.

However, First Republic did not have an easy time finding support from large banks and private equity companies on its plans to create a “bad bank” or to sell securities and mortgage book.

First Republic released its Q1 earnings report on Monday. The results show that the bank plans to reduce its balance sheet and lower expenses. Some of the proposals made by the bank include reducing the executive compensation, reducing the back office space, and laying off between 20% and 25% of the employees in Q2.

The situation with First Republic Bank is still evolving, with the bank facing an uncertain future. However, it indicates that the contagion seen in the US banking sector earlier this year is not over.