Loss of confidence following the March collapses of Silicon Valley Bank (SVB) and Signature Bank was the primary reason First Republic Bank failed in May, according to an internal review conducted by the Federal Deposit Insurance Corporation (FDIC).
The review, published Friday, was led by FDIC Chief Risk Officer Marshall Gentry and examined the causes behind the collapse of First Republic and how the FDIC could have better supervised the bank. Its scope covered 2018 until the bank’s failure on May 1.
On that day, First Republic announced its sale to JPMorgan Chase, which acquired the majority of its assets and assumed its deposits and certain other liabilities. The transaction was necessitated by stock declines at the bank following the failure of SVB that proved irreversible despite cash injections from other large U.S. banks.
“[T]here 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 SVB,” said the FDIC report, including:
- Rapid growth and loan and funding concentrations;
- Overreliance on uninsured deposits and depositor loyalty; and
- Failure to sufficiently mitigate interest rate risk.
The report further pointed to the effects of an April 24 earnings call, where it was disclosed the bank lost more than $100 billion in deposits during the first quarter of 2023, as a cause for negative market reaction that could not be overcome.
Regarding its supervision of First Republic, 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,” according to the report. The analysis also found the FDIC could have better collaborated with its San Franciso regional office regarding challenging the bank management’s strategies and assumptions.
“We cannot say whether taking earlier supervisory action such as criticizing interest rate risk or liquidity risk management would have prevented First Republic from failing given the significance and speed of deposit withdrawals,” the report concluded. “However, meaningful action to mitigate interest rate risk and address funding concentrations would have made the bank more resilient and less vulnerable to the March 2023 contagion event.”
The report’s findings mirror those of the Federal Reserve regarding its review of its supervision efforts at SVB published in April. In the aftermath of the collapses, the Fed, FDIC, and other U.S. banking regulators have come together to propose rule changes designed to allow the FDIC greater flexibility in dealing with failing banks.