FDIC receivership may be imminent for First Republic

The stock of First Republic Bank continued diving after hours on late reports from Reuters that the Federal Deposit Insurance Corporation (FDIC) is preparing to put the troubled San Francisco-based lender into receivership immediately, according to a person familiar with the matter. Earlier reports from CNBC that the First Republic would most likely come under the control of the government were confirmed by the news.

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In the meantime, the U.S. regulators issued updates on Signature Bank and SVB. A general rally was observed in the stocks of banks.

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Placement of First Republic in receivership

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After the market close on Friday, the stock of FRC fell another 47% as Reuters reported that the FDIC was preparing to seize the bank. It is believed that the regulator has decided on First Republic's position and that there is no more time for a private rescue to be pursued, an anonymous source familiar with the matter has said.

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In the wake of Friday's stock plunge of 43%, First Republic Bank stock has hit yet another record low. In a report published by CNBC Friday morning, CNBC quoted sources who know the situation as saying that the troubled bank is most likely headed for FDIC receivership. When the matter was in its early stages, there was still hope that an alternative solution could be found. There are reports that the company is in discussions with multiple parties about the company's strategic options while continuing to provide services to our clients at the same time.

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First Republic Bank Shockwaves

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Despite being heavily battered by a financial crisis, First Republic Bank (FRC) sent shock waves across the financial sector again this week after announcing deposits plummeted by $72 billion during the quarter to $104.5 billion as of March 31, even with a $30 billion injection from the nation's biggest banks such as JPMorgan Chase (JPM).

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In the wake of reports that FRC is trying to sell $50 billion to $100 billion in long-term assets as part of its efforts to shore up its balance sheet and avoid being seized by the FDIC, FRC shares fell by half on Tuesday, Bloomberg reported. The First Republic stock unraveled further Wednesday as additional reports of rescue attempts by the company poured in, prompting multiple trading halts due to volatility.

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First Republic Bank has pleaded with its former rescuers to purchase bonds at above-market rates to cover billions in losses or face $30 billion in FDIC fees if the bank fails, according to a report by CNBC. First Republic is unable to afford to sell the bonds at market value because it cannot afford it. There are a number of buyers waiting to buy newly issued shares under First Republic advisors if they are able to find volunteers to step up.

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There are reports that US regulators would prefer a private rescue of First Republic Bank before stepping in, according to Bloomberg, because they don't see the bank as a systemic risk, as reported by Bloomberg. The Fed is also considering the possibility of downgrading First Republic's CAMELS rating, which is their private assessment of the bank, which could potentially discourage the bank from borrowing money from the Fed's discount window and emergency facility, Bloomberg reported Wednesday.

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During the bank panic that has been going on this year, the FRC stock has gone down by more than 97%.

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Other Bank Stocks Are Unfazed

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In spite of the growing likelihood that First Republic may be placed under receivership by the FDIC, other bank stocks were not affected by the deposit flight that occurred at First Republic. There is a possibility that an FDIC takeover that protects depositors will avert a wider contagion from spreading.

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There was a 1.8% gain in SPDR S&P Regional Banking ETF (KRE) on Friday. Among the many components that make up the KRE is the stock of FRC.

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It is worth mentioning that the Financial Select SPDR ETF (XLF), which is dominated by major banking giants like JPMorgan, has risen by 1.2%, nearly regaining its 50-day line. Stocks of JPMorgan Chase edged higher, trading above their 50-day moving average.

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Fed Reviews SVB Failure

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Michael Barr, the Vice Chair of the Federal Reserve's Supervision Committee, released the review of failed Silicon Valley Bank at the beginning of this week. As Barr pointed out, "SVBs failed due to textbook mismanagement by the bank's senior management. He further stated that the bank's board of directors and senior leadership failed to maintain control and oversight over basic interest rates and liquidity risks led to the failure of the bank."

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There is no doubt that SVB was an outlier due to its concentrated business model, its high-interest rate risk, and the fact that it was reliant on uninsured deposits. Barr stated that social media helped spread fears and may have contributed to the speed of the bank run as well.

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However, it also revealed some weaknesses of the Federal Reserve.

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Barr stated that the Fed supervisors failed to take strong enough action against SVB and their regulatory standards were too low. Also, in its tailoring framework, the central bank did not consider the possibility of contagion or systemic risks.

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"The most important thing we need to do is develop a culture that empowers supervisors to act in uncertain times," Barr wrote. "The supervisors did not force SVB to fix the problems that were clearly evident and growing even as the weaknesses were clear and growing. As a result, even as SVB's problems worsened, supervisors did not force them to act."

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Barr said that the Fed must strengthen its framework for supervision and regulation in order to enhance its effectiveness. As the size of bank portfolios increases, some proposals include introducing more continuity in compliance standards in light of the growing bank portfolios, as well as providing multiple scenarios for stress-test modeling.

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"In light of the continued evolution of risk in the financial system, it is imperative that we continuously evaluate our supervisory and regulatory framework as well as be humble regarding our ability to assess and identify new and emerging risks," he wrote.

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Barr reiterated that officials have claimed that the banking system is sound and resilient and that it has strong capital and liquidity.