US bank regulators are considering downgrading their private assessments of First Republic Bank, a move that could limit the troubled firm’s access to Federal Reserve lending facilities.
According to sources familiar with the matter, the Federal Deposit Insurance Corp. has been giving the bank time to reach a private deal to shore up its finances.
However, as weeks pass without a transaction, senior officials are increasingly considering downgrading their scoring of the firm’s condition, including its so-called Camels rating.
This would likely restrict the bank’s use of the Fed’s discount window and emergency facility launched last month.
While the FDIC has not made a decision, and officials have not warned First Republic about their thinking, the delay in the bank’s efforts to strengthen its balance sheet has left regulators little choice but to explore other options.
If the firm can reach a deal with new backers to strengthen its finances, this could avoid the need to lower ratings.
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.
On Tuesday, the stock lost half its remaining value after quarterly results disappointed investors and news broke that the firm might sell $50 billion to $100 billion of assets.
One of the obstacles to a solution has been the conflicting needs of US officials and the banks that might help.
While 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.
They have been waiting for the government to offer aid, such as the FDIC taking control of the firm’s least desirable assets, which can only happen under the law if First Republic fails and is put into receivership.
Spokespeople for the company, FDIC, Fed, and Treasury declined to comment.
First Republic Bank’s stock price plummeted by as much as 41% on Wednesday, following reports that the bank’s advisers had lined up potential buyers for new shares.
The sale of the shares would only proceed if larger banks, which have already contributed $30 billion of deposits to bolster First Republic, agree to buy bonds from the company for more than their worth.
This move would lead to an immediate loss for the banks, but they could benefit from an increase in First Republic’s stock price and avoid a bigger loss on their deposits and any FDIC fees that would result from a failure.
The FDIC has been monitoring the bank’s situation closely and has sent additional staff to First Republic’s San Francisco headquarters to keep tabs on its health.
While authorities do not view the bank’s fate as posing a systemic risk, the FDIC is reportedly considering downgrading its rating of the bank’s condition, a move that would limit its access to Federal Reserve lending facilities.
These developments come as the Fed prepares to release a report to Congress on Friday, examining whether bank watchdogs were vigilant enough in their oversight of Silicon Valley Bank before its sudden collapse last month.
The Fed’s vice chair for supervision, Michael Barr, has already acknowledged that supervisors could have done more to prevent that debacle.
First Republic was one of the banks affected by waves of withdrawals during last month’s regional banking crisis, as wealthy customers and businesses withdrew their funds due to concerns that rising interest rates were eroding the value of lenders’ assets.
Concerns about the health and future earnings of the bank have been reignited after it reported a 41% drop in deposits for the quarter, a worse-than-expected result.
This has led to uncertainty, with executives declining to answer questions during a briefing with analysts on Monday.
The bank confirmed that it is exploring strategic options.
In order to borrow from the Federal Reserve’s emergency facility and discount window, banks must be deemed to be in sound condition.
The Fed takes into account factors such as capital and supervisory ratings.
Banks that fail to meet the criteria may face restrictions on the frequency and duration of their borrowing.
In its earnings report on Monday, First Republic Bank stated that it had $45.1 billion in unused available borrowing capacity and cash on hand as of last week.
The bank also reported that this was twice the level of uninsured deposits, excluding the $30 billion deposit infusion from the largest US banks last month.
The bank’s executives also mentioned that 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.
Finding a buyer for First Republic Bank may prove challenging, even if the lender is open to selling.
According to insiders, bankers are hesitant to purchase the bank, either in part or as a whole, unless the FDIC agrees to assume some of its assets.
Potential buyers have learned that waiting until a weakened bank fails can lead to more attractive deals, as was the case with SVB and Signature Bank after their collapse last month.
However, the potential failure of First Republic poses a risk to the executives of many of the largest US banks, who are concerned about losing deposits they recently contributed to keep the struggling lender afloat.
These deposits were intended to give First Republic more time to find a viable solution to its financial woes.