FDIC Review Identifies Supervision Shortcomings in First Republic Bank’s Failure

The Federal Deposit Insurance Corporation (FDIC) has identified supervision shortcomings around the failure of First Republic Bank.

In an internal review released Friday (Sept. 8), the FDIC evaluated its supervision of First Republic Bank from 2018 until its failure in May. The review shed light on the causes of the bank’s failure and assesses the effectiveness of the FDIC’s oversight, the FDIC said in a Friday press release.

The report determined that First Republic Bank’s downfall can be attributed to “a loss of market and depositor confidence, resulting in a bank run,” according to the release. This loss of confidence was triggered by the failures of Silicon Valley Bank and Signature Bank in March.

Certain aspects of First Republic’s business model and management strategies made it more susceptible to interest rate changes and the subsequent contagion, the release said. These factors included rapid growth, loan and funding concentrations, overreliance on uninsured deposits and depositor loyalty, and inadequate mitigation of interest rate risk. The report emphasized that, given the bank’s size, sophistication and risk profile, additional proactive measures should have been taken to mitigate interest rate risk.

The report said the FDIC supervised First Republic Bank through a continuous examination process, per the release. The examination team issued required examination products promptly, assigned generally positive examination ratings and provided limited supervisory recommendations.

However, the report also highlighted areas where the FDIC could have been more forward-looking in assessing the potential negative impact of increasing interest rates on the bank, according to the release. It suggested that the FDIC could have challenged and encouraged bank management to implement strategies to mitigate interest rate risk more effectively.

Additionally, the report suggested that a more holistic approach to supervision, involving greater involvement of FDIC headquarters supervision resources and leadership, could have been beneficial in challenging bank management’s strategies and assumptions and providing a broader understanding of risks, the release said.

The internal review identified eight items for further study, focusing on FDIC examiner guidance and processes, per the release.

First Republic Bank was taken over by the FDIC May 1 following weeks of teetering on the edge of collapse. The regulator had held an auction April 30 seeking a buyer for the lender and ultimately settled on J.P. Morgan.

Amid the banking crisis that began in March, First Republic found itself downgraded by ratings agencies due to its level of uninsured deposits held by its wealthy customer base.