The California Department of Financial Protection and Innovation announced early Monday that the Federal Deposit Insurance Corp had taken possession of First Republic.
This marks the third time the U.S. government has taken control of a U.S. lender this year.
First Republic is the third — and biggest — U.S. bank to fail this year. In March, federal regulators swept in to protect customers of Silicon Valley Bank and Signature Bank. Citing potential risk to the broader financial system, they took unprecedented action to insure all deposits at the two banks — even deposits that exceeded the FDIC’s $250,000 threshold for insurance.
The government protected bank customers, but it didn’t bail out shareholders who were wiped out.
After Silicon Valley Bank and Signature Bank were taken into receivership, the FDIC solicited bids to buy the two lenders. A subsidiary of New York Community Bank bought most of Signature Bank, and First Citizens Bank acquired Silicon Valley Bank.
More bank runs
The twin failures of Silicon Valley Bank and Signature Bank threatened to spark more bank runs. But that hasn’t happened, according to other lenders’ recent earnings reports. By and large, deposits have stabilized.
“That fear, that mass exodus that people were concerned about just didn’t happen,” says Jared Shaw, a bank analyst at Wells Fargo Securities, who notes lenders were proactive.
“One of the things that the banks did a great job with was reaching out to their customers, explaining their balance sheets, and explaining where their liquidity comes from.”
That seemed to calm nervous customers and investors. But First Republic was the exception.
“That deposit pressure was worse than expected,” Shaw says.
First Republic shares tumbled last week
First Republic’s death spiral began in earnest last Monday, when it announced that it had lost $100 billion worth of deposits during the first three months of the year. Trading of the bank’s shares became so volatile that the New York Stock Exchange halted trading several dozen times last week.
On Friday, shares closed at $3.51 — down more than 97% year to date.
The San Francisco-based bank, which was founded in 1985, mostly catered to wealthy clients, offering home mortgages and commercial loans.
First Republic first came under intense scrutiny after Silicon Valley Bank and Signature Bank collapsed. Yet 11 of the country’s biggest banks, led by J.P. Morgan Chase, threw First Republic a lifeline when they deposited $30 billion in it.
Those moves ultimately failed to convince Wall Street, and customers continued to withdraw their deposits from the bank.
First Republic was running out of options
First Republic attempted to sell itself but found few takers, leaving a government-led rescue as the only available option.
The FDIC actions come as regulators themselves have been under scrutiny about whether they could have done more to prevent the failures of Silicon Valley Bank and Signature Bank.
On Friday, the Federal Reserve and the FDIC issued reports on what led to the collapses of those two lenders. They blamed management while admitting they could have done more to oversee the banks.
The FDIC is scheduled to release another report on Monday, including proposed changes to deposit insurance.