JPMorgan Chase, Bank of America asked for bids

U.S. regulators have asked banks for their best and final takeover offers for First Republic by Sunday afternoon, in a move that authorities hope will calm markets and cap a period of uncertainty for regional lenders.

JPMorgan Chase and PNC are likely bidders for the ailing lender, which would be seized in receivership and immediately sold to the winning bank, according to people with knowledge of the situation. The Wall Street Journal reported those banks’ interest late Friday.

Bank of America opted not to make a final bid after being involved in earlier discussions, CNBC has learned, according to other people with knowledge of the situation.

If regulators led by the FDIC receive an acceptable offer by Sunday, it’s possible a new First Republic owner could be announced soon. That scenario would create the least disruption for First Republic customers, who would start the week knowing their bank was now owned by a financially-stable operator.

The First Republic auction may end a tumultuous period for midsized U.S. banks. Since the failure of Silicon Valley Bank in March, attention has turned to First Republic as the weakest link in the American banking system. Shares of the bank sank 90% last month, and then collapsed further this week after First Republic disclosed how dire its situation is.

Like SVB, which catered to the tech startup community, First Republic is also a California-based specialty lender. It focused on serving rich Americans, enticing them with low-rate mortgages in exchange for leaving cash at the bank. That model unraveled in the wake of the SVB collapse as First Republic clients withdrew more than $100 billion in deposits, the bank disclosed Monday.

As First Republic’s situation deteriorated, regulators initially cast a wide net, asking a large group of banks what they thought the company was worth, according to a person with knowledge of the process. That group has narrowed in recent days, with the idea that regulators would share information necessary to make a final bid only with the most serious contenders.

Regulators are expected to choose the bid that results in the smallest financial hit to the FDIC for resolving First Republic, according to a person with knowledge of the situation.

The SVB failure, by way of example, will cost the FDIC’s Deposit Insurance Fund roughly $20 billion, the agency said. The biggest banks will bear the brunt of that expense, because member banks will likely be assessed fees to replenish the FDIC fund over several years.

While the emergency takeovers of SVB and Signature both involved invoking a systemic risk exception to protect uninsured depositors from losses, that probably won’t be necessary in the First Republic receivership. That’s because the new owner would presumably be able to handle deposit outflows; in the case of SVB’s receivership, it took two full weeks to announce a deal.

The auction means it’s likely one of the biggest U.S. banks will grow even larger and benefit from a government-brokered receivership process that leaves the FDIC holding undesirable assets.

That’s what happened when SVB was sold to First Citizens last month; the buyer won a raft of concessions including loss-sharing agreements. First Citizens’ shares shot up 55% on news of the favorable deal.

The likely bidders are all represented in the group of 11 banks that banded together last month to inject $30 billion in deposits into First Republic. That move helped stem the larger deposit drain from midsized banks into top-four institutions including JPMorgan and Wells Fargo, thus giving regulators breathing room to resolve First Republic, CNBC reported last month.

But not every big bank that participated in the deposit injection will make an offer. Wells Fargo, Goldman Sachs and Citigroup are each unlikely to make a bid, according to people with knowledge of the banks.

Wells Fargo is still laboring under a 2018 asset cap imposed by the Federal Reserve. Goldman has made a strategic decision to pivot away from retail finance and is selling consumer loans. Citigroup has been offloading business units to simplify operations while improving its risk controls.

The takeover makes the most sense for institutions looking to grow among the coastal affluent; First Republic’s branches are concentrated in California, New York, Boston and Florida.

First Republic’s advisors had hoped to avoid a government takeover by persuading the biggest U.S. banks to help once again. One version of the plan circulated recently involved asking banks to pay above-market rates for bonds on First Republic’s balance sheet, which would enable it to raise capital from other sources.

But ultimately the banks wouldn’t bite on the last-ditch effort, leaving the government poised to end First Republic’s 38 year run.