The Federal Deposit Insurance Corp (FDIC) has come forward with insights into the failure of First Republic Bank, suggesting that more assertive risk management oversight might have been necessary, although it remains uncertain if it could have averted the bank’s downfall, given the rapid withdrawal of deposits by customers. The FDIC’s report, published recently, reveals that the loss of market and depositor confidence ultimately led to the demise of the California-based bank, which marked the second-largest bank failure in U.S. history.
The FDIC report places some blame on the bank’s executives and board, citing their disregard for warning signs of escalating interest rate risk. However, the FDIC also acknowledges its own role in the matter, noting that its supervisors were overly lenient in assessing certain risks associated with First Republic, particularly concerning interest rates and uninsured deposits. During a period when the bank doubled in size, the regulator found that the time its supervisors dedicated to monitoring the bank actually decreased, raising questions about the allocation of agency resources.
“In retrospect, it does not appear that banks or banking regulators had sufficient appreciation for the risks that large concentrations of uninsured deposits could present in a social media-fueled liquidity event,” the regulator noted.
First Republic’s failure occurred in the context of a turbulent period for the banking sector, starting with the sudden collapse of Silicon Valley Bank in March. Subsequently, First Republic was taken over by the FDIC, with most of its assets being sold to JPMorgan Chase.
This report echoes similar findings by regulators regarding the failures of SVB and New York-based Signature Bank, adding to the mounting pressure on regulators to tighten their grip on the industry. The Federal Reserve admitted that its supervisors did not escalate concerns promptly and did not allocate sufficient resources. Likewise, the FDIC’s post-mortem of the Signature Bank failure in April revealed resource deficiencies in supervising the bank as it pursued an overly aggressive growth strategy.
While U.S. regulators have proposed stricter rules for larger banks, the banking industry and congressional Republicans argue that existing rules need better supervision rather than additional requirements—a viewpoint challenged by advocates of tighter regulation.
“Both regulation and supervision must be strengthened,” emphasized CEO Dennis Kelleher of Better Markets, an organization supporting stricter regulation, in response to the FDIC’s report.
