FDIC says it screwed up in regulating First Republic Bank before it collapsed

The Federal Deposit Insurance Corporation (FDIC) admitted that it fell short in regulating First Republic Bank in the years leading up to its collapse.

First Republic Bank was closed by the California Department of Financial Protection and Innovation on May 1, 2023, and appointed as the receiver the FDIC, which entered into an agreement with JPMorgan Chase Bank in Columbus, Ohio, to assume all of the deposits and substantially all of the assets of the failed financial institution.

The federal banking regulator’s Chief Risk Officer Marshall Gentry released an internal review evaluating the agency’s supervision of First Republic Bank, San Francisco, California, from 2018 until its failure in May 2023.

The federal banking regulator concluded that it could have done better before the March 2023 United States bank crisis, when three small- to mid-size U.S. banks failed over the course of five days.

The report describes the causes of First Republic Bank’s failure and evaluates the FDIC’s supervision of the bank. The review was conducted at the request of FDIC Chairman Martin

The report cites “a loss of market and depositor confidence, resulting in a bank run” following the March 2023 failures of Silicon Valley Bank and Signature Bank as the primary cause of failure.

The report notes there were attributes of First Republic’s business model and management strategies that made it more vulnerable to interest rate changes and the contagion that ensued following the failure of Silicon Valley Bank.

These attributes included, “rapid growth and loan and funding concentrations, overreliance on uninsured deposits and depositor loyalty, and failure to sufficiently mitigate interest rate risk.”

The report notes that “[f]or an institution of its size, sophistication, and risk profile, the bank should have taken additional proactive measures to mitigate interest rate risk.” 

The report notes that FDIC supervised the First Republic Bank under a continuous examination process and that the dedicated examination team issued required examination products timely, assigned generally positive examination ratings, and issued few Supervisory Recommendations. 

However, the report acknowledges that the FDIC could have been more forward-looking in assessing how increasing interest rates could negatively impact the bank and could have done more to effectively challenge and encourage bank management to implement strategies to mitigate interest rate risk. 

Given First Republic’s size, there were also opportunities for the FDIC to take a more holistic approach to supervising the bank, including greater involvement of FDIC headquarters supervision resources and leadership in assisting the San Francisco region with effectively challenging bank management’s strategies and assumptions, and bringing a broader horizontal perspective and understanding of risks. 

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