First Republic Bank is running up against a grim reality in its fight for survival: There are seemingly no good options.
Any solution would likely require assistance from regulators, the government or other lenders. But the darkening economic outlook, bad lending decisions and limits on Washington policy makers pose hurdles for any intervention.
The stakes are high, in part because what they do with First Republic could create a template for how they deal with other troubled banks. The regulators and big banks want to stop the crisis from spreading without having to play whack-a-mole with future banking problems.
First Republic disclosed Monday that it had lost about $100 billion in deposits in the first quarter, following the collapses of Silicon Valley Bank and Signature Bank. That prompted a group of 11 big banks to deposit $30 billion with First Republic last month in hopes of stabilizing it.
That worked for a short period. But it didn't solve the bigger issues: First Republic specialized in making huge mortgages, often at low rates, to wealthy borrowers, and that business model no longer works. Now the bank is sitting on a pile of loans that are mispriced for the current interest-rate environment.
First Republic has recently floated a new rescue plan to the 11 banks, according to people familiar with the matter. Its proposals included a plan whereby the other banks would buy First Republic's loans or securities, or both, at prices above market value.
A spokesman for First Republic declined to comment. The bank on Monday said it had retained 97% of client relationships from the start of the first quarter.
The bank's earnings release showed just how dire the situation is. The already-hobbled stock fell nearly 50% on Tuesday and is down a further 30% to $5.69 on Wednesday trading hours. Trading was temporarily halted several times for volatility on both Tuesday and Wednesday.
Essentially, the stock market is saying that First Republic is nearly worthless in its current state.
"It's hard for me to see a good outcome for the equity holders at this point," said David Smith, a U.S. banks analyst at Autonomous Research. "All of the options on the table seem to involve getting either wiped out or seriously diluted."
It has lost more than 90% of its value since the banking crisis began in early March, a far worse decline than even some other banks -- such as PacWest Bancorp or Western Alliance Bancorp. -- that are viewed as potentially problematic.
The bulk of First Republic's balance sheet consists of loans, amounting to about $173 billion at the end of March. And a huge portion of these, about $100 billion, are single-family mortgages, many of them made when interest rates were far lower than they are today.
The upshot: As of Dec. 31, First Republic's loan book had about $22 billion in unrealized losses based on the market value of its loans. Though it is possible that the figure narrowed during the first quarter, those unrealized losses are still significant and make it difficult to find a buyer for the bank.
At the same time, the deposit run has forced First Republic to rely on other, more expensive funding. That makes it hard to generate interest income, and at some point it might not be able to.
"They've never been super profitable," said Tim Coffey, managing director and analyst at Janney Montgomery Scott. "Now you're not growing and you're layering on really high borrowing and funding costs."
Part of First Republic's pitch to the other banks: The big banks would have to pay up anyway if First Republic failed. If the Federal Deposit Insurance Corp. guaranteed all depositors, the other banks would be hit with a special assessment for a federal insurance fund. If the FDIC didn't guarantee depositors, the banks would take a haircut on their uninsured deposits.
Banks pay assessments into the insurance fund so that the FDIC has funding when banks fail. Last month's two big bank failures have already cost the insurance fund an estimated $22.5 billion, the bulk of that tied to Silicon Valley Bank's collapse.
The banks could get warrants in return for buying First Republic's loans or securities, and those could potentially be profitable in the future -- as long as First Republic survives. But purchasing some or all of the loans works only if buyers are willing to take on losses, essentially subsidizing First Republic.
Another idea that was previously floated was that the big banks could convert some of their $30 billion in deposits into equity, according to people familiar with the matter. But that would simply shift the losses, and potential future ones, onto those banks.
The banks might also believe that they are more likely to get their money back if they keep it in deposits, since Treasury Secretary Janet Yellen has signaled that the federal government could protect customers with uninsured deposits if regulators see the risk of a run on the banking system.
First Republic also reached out to private-equity firms about providing private capital, according to people familiar with the matter.
U.S. government officials can bring together the banks to try to hammer out a deal, but few believe they can compel banks to participate in a rescue. Post-financial-crisis rules significantly limited the ability of regulators to offer financial assistance to struggling firms before their failure, by, for example, creating programs that benefit only a single bank.
Many believe the FDIC might ultimately be able to provide assistance only if they seize the bank, wipe out shareholders and replace management as part of an engineered sale. However, the details and extent of the FDIC's support will be determined on whether they use the same tool, a so-called systemic risk exception, that allowed the agency to guarantee all of the depositors at last month's two failed institutions.
Invoking that exception again would allow regulators to backstop all of the roughly $50 billion in deposits at First Republic that are above the FDIC's insurance limit, including the $30 billion deposited by the big banks.
If the FDIC doesn't make those depositors whole, it could reignite questions about such deposits at other regional banks, causing customers to yank their deposits from smaller firms. But if it does, the FDIC could be accused of bailing out Wall Street.
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