FDIC's McKernan says failed-bank auctions aren't competitive

Amanda Andrade-Rhoades/Photographer: Amanda Andrade-Rho

The Federal Deposit Insurance Corp. failed to create a level playing field for nonbank bidders pursuing First Republic Bank, according to FDIC board member Jonathan McKernan. 

"Since the [Silicon Valley Bank] auction, I've pushed for changes to build more competitive tension in our failed-bank auctions so we get the best price," McKernan said in an interview, referring to the seizure and sale of Silicon Valley Bank to First Citizens BancShares in March. "But the FDIC ran essentially the same process again for First Republic." 

In the early hours of Monday morning, JPMorgan Chase emerged as the victor in a bidding process for San Francisco-based First Republic, beating out rivals including PNC Financial Services Group, which submitted proposals supported by Apollo Global Management Inc. and BlackRock Inc., Bloomberg News reported this week. 

"We didn't give nonbank bidders a real opportunity to participate on the same terms as bank bidders with respect to loss-share arrangements and deal financing, so, again, there's a real question whether we left value on the table," McKernan said. "The bottom line here is the FDIC is hindering the ability of nonbanks to participate in these auctions. Their participation is really in name only."

An FDIC representative didn't immediately respond to a request for comment.

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McKernan — one of five FDIC board members, who are charged with ensuring the agency fulfills its mission — last month expressed disappointment regarding the FDIC's approach to failed-bank auctions, saying that the regulator should do more to get the best price by seeking to "actively involve potential bidders of all types," including institutions outside the banking system.

"I'll continue to make the case for improvements, but it's hard to avoid the conclusion that there simply is resistance to nonbanks acquiring failed-bank assets," McKernan said in his latest interview. "That resistance can mean bigger losses in our failed-bank auctions, which then means bigger increases in deposit assessment for banks and higher costs for bank customers."

The FDIC's mandate is to obtain resolutions that result in the lowest cost to the Deposit Insurance Fund. If nonbank bidders were granted to access loss-sharing or financing incentives, it's unclear whether their proposals would have delivered a smaller burden to the DIF than JPMorgan's offer.

The New York-based banking giant was the only bidder that offered to take all of First Republic off the FDIC's hands in the cleanest way and saved the FDIC several billion dollars compared with alternative bids, Bloomberg has reported.