WASHINGTON – The failed First Republic Bank was done in large part by a lack of controls to mitigate interest rate risk, according to a new report from the FDIC that also faults the regulator/insurer for its shortcomings.
The internal review from FDIC Chief Risk Officer Marshall Gentry evaluated the agency’s supervision of San Francisco-based First Republic Bank from 2018 until its failure in May 2023.
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 further states 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.
Lack of ‘Proactive Measures’
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,” according to the FDIC.
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 said the FDIC supervised First Republic 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.”
Agency Should Have Been ‘More Forward-Looking’
“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,” the FDIC said in releasing the findings. “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.”
The internal review identifies eight items for further study focusing on FDIC examiner guidance and processes.
Nation’s Biggest Bank Gets Bigger
First Republic Bank was closed by the California Department of Financial Protection and Innovation on May 1, 2023, and appointed the FDIC as receiver. The FDIC entered into a purchase and assumption agreement with JPMorgan Chase Bank.