The Federal Deposit Insurance Corporation (FDIC) released an internal review evaluating the agency’s supervision of First Republic Bank, which failed earlier this year.
The report, conducted by FDIC Chief Risk Officer Marshall Gentry, examined the bank from 2018 through its failure in May 2023. It provides information on the causes of First Republic Bank’s failure and evaluates the FDIC’s supervision of the bank.
As the primary cause of failure, 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. Further, it notes that 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 after 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.”
It also stated that FDIC supervised First Republic under a continuous examination process. It determined that the dedicated examination team issued required examination products timely, assigned generally positive examination ratings, and issued few Supervisory Recommendations.
However, the report does acknowledge that the FDIC could have been more forward-looking in assessing how increasing interest rates could negatively impact the bank. It also said that the FDIC could have done more to effectively challenge and encourage bank management to implement strategies to mitigate interest rate risk.
The report added that given First Republic’s size, there were also opportunities for the FDIC to take a more holistic approach to supervising the bank. That type of approach would include greater involvement of FDIC headquarters supervision resources and leadership in assisting the San Francisco region with challenging bank management’s strategies and assumptions. It would also entail bringing a broader horizontal perspective and understanding of risks.
Finally, the internal review identified eight items for further study focusing on FDIC examiner guidance and processes.