First Republic Faces Potential Curb on Borrowing From Fed

(Bloomberg) -- US bank regulators are weighing the prospect of downgrading their private assessments of First Republic Bank — a move that may curb the troubled firm’s access to Federal Reserve lending facilities.

The Federal Deposit Insurance Corp. has been giving the bank time to reach a private deal to shore up its finances. But as weeks keep passing without a transaction, senior officials are increasingly weighing whether to downgrade their scoring of the firm’s condition, including its so-called Camels rating, according to people with direct knowledge of the talks. That would likely limit the bank’s use of the Fed’s discount window and an emergency facility launched last month, the people said.

The FDIC hasn’t reached a decision, nor have officials warned First Republic about their thinking while waiting on the bank’s managers to shore up its balance sheet, some of the people said, asking not to be identified discussing the private conversations. If the firm is able to reach a deal with new backers to strengthen its finances, that could head off the need to lower ratings.

Spokespeople for the company, FDIC, Fed and Treasury declined to comment.

First Republic has been struggling to find a rescuer for weeks, and any steps to raise capital or sell holdings quickly could be painful for current shareholders. The stock lost half its remaining value on Tuesday after quarterly results disappointed investors and news broke that the firm might sell $50 billion to $100 billion of assets.

One stumbling block to a solution has been the conflicting needs of US officials and the banks that might help. The regulators favor a private rescue that doesn’t involve the US seizing the bank and taking a multibillion-dollar hit to the FDIC’s insurance fund. Banks want to avoid anything that damages their own finances and have been waiting for the government to offer aid, such as the FDIC taking control of the firm’s least desirable assets — something that can happen under the law only if First Republic fails and is put into receivership.

The stock price plunged 30% Wednesday, with the shares halted for volatility multiple times during the trading day. CNBC reported earlier in the day that the bank’s advisers have lined up potential buyers for new shares. That would proceed only if larger banks, which already have contributed $30 billion of deposits to bolster First Republic, agree to buy bonds from the company for more than they’re worth. The banks would suffer an immediate loss, but might benefit from a rise in First Republic’s stock price and by averting an even bigger loss on the deposits they made and any FDIC fees that would follow a failure.

The talks among FDIC officials are playing out as the Fed prepares to deliver a highly anticipated report to Congress on Friday, examining whether bank watchdogs were vigilant enough in their oversight of Silicon Valley Bank before its abrupt collapse last month. Michael Barr, the Fed’s vice chair for supervision, has already said supervisors could have done more to get ahead of that debacle.

The FDIC has sent some additional staff to First Republic’s San Francisco headquarters in recent days to help keep routine tabs on its health. Authorities don’t view the bank’s fate as posing a systemic risk, the people said, and the agency has stopped short of threatening to put the bank into receivership, the people said.

First Republic was among banks that faced waves of withdrawals during last month’s regional-banking crisis, as wealthy customers and businesses yanked their money over worries that rising interest rates were eroding the value of lenders’ assets.

Investor concerns over its health and prospects for earnings reignited this week as the bank reported quarterly results that showed deposits fell 41% in the period, worse than analysts had estimated. A decision by executives not to take questions while briefing analysts on the results late Monday added to the uncertainty. They did confirm that they’re seeking strategic options.

Banks are generally eligible to borrow from the Fed’s emergency facility and discount window if they’re deemed to be in sound condition.

The Fed considers factors including their capital and supervisory ratings. Firms that don’t pass muster can face limits on the frequency or duration of their borrowings, according to the Fed’s website.

Available Cash

In Monday’s earnings report, the California bank said it had $45.1 billion in unused available borrowing capacity and cash on hand as of last week. The lender said that was double the level of uninsured deposits, excluding the $30 billion infusion of deposits from the largest US banks last month. Moreover, executives said, withdrawals had slowed in recent weeks.

“With the stabilization of our deposit base and the strength of our credit quality and capital position, we continue to take steps to strengthen our business,” Chief Executive Officer Mike Roffler and Chairman Jim Herbert said in a statement at the time.

Even if First Republic is willing to sell, a buyer might not be easy to find. Bankers are reluctant to acquire the bank in whole or in part unless the FDIC takes on some assets, according to people familiar with the matter.

Bidders have also learned that they can get a better deal by waiting until a weakened lender fails, then scooping up their businesses and assets at lower prices. Firms that bought SVB and Signature Bank after they toppled last month saw their stocks pop after the deals were announced.

Still, if First Republic ultimately fails, executives at many of the nation’s largest banks are concerned they’ll lose some of the fresh deposits their firms contributed to prop up the company just weeks ago — an effort to give it more time to find a solution.