First Republic, whose shares have lost much of their value since the banking crisis started in the U.S. on March 8, is among the banks speaking to peers and investment firms about potential deals in the wake of U.S. regulators taking over Silicon Valley Bank and Signature Bank this month following bank runs.

Morgan Stanley analyst Manan Gosalia, in a report earlier this week, set a target price of $54 for First Republic shares. The optimistic case is based on a scenario in which the Federal Deposit Insurance Corporation (FDIC) insures all consumer deposits, according to a report published on Monday.

That hope was reduced on Wednesday, after Treasury Secretary Janet Yellen said during a hearing of the U.S. Senate's Appropriations Subcommittee on Financial Services that the government "is not considering insuring all uninsured bank deposits." Yellen also said the Treasury has not considered anything to do with guarantees for assets.

First Republic Bank shares were down more than 11% at $14.02.

Morgan Stanley analyst report considered that such a move by the FDIC could bring a majority of First Republic's customers back. Banks involved in First Republic's rescue negotiations are asking for a loss-sharing arrangement with the U.S. government similar to the terms agreed by UBS Group in its emergency takeover of rival Credit Suisse, according to an industry source.

The acquirer would receive support if after buying First Republic it finds a larger loss than expected, added the source, who requested anonymity to disclose private conversations.

"What people need is some sort of a timely resolution to the First Republic situation," the person said. A loss-sharing agreement with the government would "facilitate the deal," said the industry source.

First Republic declined to comment.

The bank is looking at ways it can downsize if attempts to raise new capital fail, Reuters reported on Tuesday, citing three people familiar with the matter.

Even if it clinches a cash infusion, the lender will probably need to take losses on securities in its so-called held to maturity portfolio, the Morgan Stanley analysts wrote.

A potential buyer would need to absorb losses of $26.8 billion in mark-to-market from First Republic's loan and securities portfolios, while an extra $9.5 billion is needed to recapitalize the bank, the Morgan Stanley analysts estimated.

In the worst-case scenario, First Republic's shares would sink to just $1, Morgan Stanley analysts estimated.

Citigroup withdrew its estimates for First Republic on Tuesday and put the stock under review. Analysts Arren Cyganovich and Kaili Wang said in a report that "some form of government intervention seems increasingly likely, albeit in what form remains unclear."

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