How much a First Republic failure would cost

If First Republic Bank fails — and its failure is, at this point, priced into both the stock market and the bond market — then the U.S. government is going to reward select financial institutions with billions of dollars' worth of gains.

Why it matters: Bank rescues are often seen as government bailouts, while bank failures are seen as being more punitive.

• In reality, however, the government invariably ends up being extremely generous to the banking sector whenever there's a failure.

How it works: When a bank fails and is sold by the FDIC in a fire sale, the government is generally forced to throw in billions of dollars' worth of sweeteners.

• In the event that happens to First Republic, those sweeteners are likely to be worth roughly $20 billion to whichever acquirer ends up with the bank's operations.

Flashback: When First Citizens bought what remained of Silicon Valley bank, its share price soared to an all-time high. That's hardly surprising, given that it paid a discount of $16.5 billion to the value of the assets it was acquiring, and was allowed to borrow $35 billion from the FDIC at a concessionary 3.5% interest rate.

Driving the news: UBS is set to record the largest banking profit of all time next quarter, after acquiring Credit Suisse at a discount to book value of roughly $60 billion — all of which will appear in the results as a one-off windfall gain.

Between the lines: It's not just First Republic's eventual acquirer who stands to make billions from the deal.

• A consortium of 11 banks has $30 billion on deposit at First Republic — all of which is uninsured by the FDIC. That money is theoretically at risk if First Republic fails.
• Realistically, the government will declare a systemic risk exception and insure all those $30 billion in deposits. Those billions will flow from the government — in the form of the FDIC — to America's biggest banks: JPMorgan, Bank of America, Wells Fargo and Citigroup ($5 billion each); Goldman Sachs and Morgan Stanley ($2.5 billion each); and a group of regional banks, including Truist and PNC, getting $1 billion each.

The intrigue: The West Coast institution that in many ways is best placed to take over First Republic is Wells Fargo, which covets the regional bank's well-heeled customer base.

• But Wells is operating under a deposit cap and a consent decree, and the government doesn't want it getting any bigger.

The bottom line: All banks are effectively public-private partnerships. When a bank fails, the government ends up bearing most of the brunt.