© Jeff Chiu/AP
A pedestrian walks toward a First Republic Bank location in San Francisco, Tuesday, April 25, 2023. First Republic Bank’s stock plunged Tuesday after it said depositors withdrew more than $100 billion during last month’s crisis, with fears swirling that it could be the third bank to fail after the collapse of Silicon Valley Bank and Signature Bank. (AP Photo/Jeff Chiu)

Shares of First Republic Bank fell sharply Wednesday, continuing an astonishing decline that poses a fresh challenge for the Biden administration and industry regulators.

After losing roughly half of their value Tuesday, First Republic’s shares fell by an additional 30 percent Wednesday.

San Francisco-based First Republic, which has a wealthy clientele, peaked at $147 per share in early February before the failure in mid-March of two other midsize banks threatened to ignite a wider financial contagion. By late Wednesday morning, its share price had dipped below $5 before rebounding to close at $5.69.

On Wednesday, government officials, regulators and industry executives scrambled to craft a solution to the bank’s escalating woes. Selling the bank to a healthier financial institution would be the preferred remedy. But finding a buyer willing to absorb the unrecognized losses on securities owned by the bank will not be easy.

“They’re going to have to intervene — I don’t think they can sell it,” said one banking source who was familiar with the ongoing discussions with senior government officials and spoke on the condition of anonymity. “People have been going through the numbers and there’s been unrecognized losses there. So who is going to eat these losses?”

Silicon Valley Bank’s risk model flashed red. So its executives changed it.

First Republic’s chief problem is the effect of rising interest rates. The bank’s funding costs are rising, as it must pay more to acquire and keep deposits, while its earnings from low-yielding securities and loans remain the same, according to Karen Petrou, managing partner of Federal Financial Analytics, a Washington consultancy.

“This is what happened to the [savings-and-loans institutions] in the 1980s: The cost of deposits rises and the bank has a large portfolio of lower-rate loans or securities. The cost of doing business becomes higher than the return they can realize,” she said.

First Republic is now paying rates near 5 percent to borrow from the Federal Reserve and the Federal Home Loan Banks. And it must offer customers interest of 2.8 percent on interest-bearing checking accounts, up from almost nothing at this time last year.

But it is earning just 3 percent on its long-term residential mortgages and tax-exempt municipal bonds, according to its latest quarterly earnings statement.

Like California’s Silicon Valley Bank, First Republic owns bonds that have lost value over the past year as interest rates rose at their fastest pace in 40 years. The bank can escape recognizing the losses by holding the securities until they mature in several years. But it can be forced to take the crippling financial hit now if it needs to sell the securities to raise cash to meet depositors’ withdrawal demands.

“There are lots of other banks that have been doing the same,” said Lawrence White, an economics professor at New York University’s Stern School of Business.

On Monday, First Republic revealed that more than $100 billion in deposits had vanished during the first three months of the year, as customers spooked by the collapse of SVB and Signature Bank of New York fled for the perceived safety of the nation’s largest institutions.

The news came as First Republic said its first-quarter earnings had plunged nearly 20 percent.

“With the closure of several banks in March, we experienced unprecedented deposit outflows,” said Neal Holland, the bank’s chief financial officer. “We are working to restructure our balance sheet and reduce our expenses and short-term borrowings.”

First Republic appeared to have weathered the initial storm in mid-March when JPMorgan Chase led an 11-bank team in depositing with it $30 billion. The move was aimed at reassuring depositors that the bank could meet future withdrawals.

In the weeks since regulators seized SVB and Signature Bank, Treasury Secretary Janet L. Yellen and Fed Chair Jerome H. Powell have repeatedly assured the public that the nation’s banking system is sound.

On Monday, First Republic executives said they were exploring “strategic options” to stay alive.

The bank needs to unload some of its unattractive securities and loans, which won’t be easy. Any buyer could find higher-yielding investments on the open market.

But if First Republic cannot find a private-sector solution, the Biden administration and federal regulators will face pressure to repeat the sort of rescue they mounted when SVB and Signature Bank failed.

Officials declared those banks systemically important — meaning their uncontrolled collapse could topple dominoes across the financial system. To prevent a wider panic, regulators guaranteed all deposits, including uninsured funds above the $250,000-per-account federal limit.

Government officials were criticized for that move and may be reluctant to give First Republic’s customers the same treatment. But allowing the bank to fail would mean potential losses of nearly $50 billion for uninsured depositors, roughly half of the bank’s total deposits at the end of March, according to its financial statements.

Those figures include the $30 billion that the JPMorgan-led group of banks deposited last month with First Republic.

“It would certainly create confusion about exactly where the government is drawing the line for protecting depositors,” said Steven Kelly, a senior researcher at the Yale Program on Financial Stability. “It’s difficult because First Republic failing now probably isn’t systemic, but the government treating uninsured depositors differently than it did for SVB and Signature would seem incredibly unfair and inconsistent with officials’ public reassurances.”