FDIC: Supervisors’ role unclear in First Republic Bank failure

There is no clear answer as to whether earlier supervisory action by the FDIC would have prevented First Republic Bank from failing given the significance and speed of deposit withdrawals, the agency concluded in a new report on its supervision of the bank, released today. Still, it noted that “meaningful action” to mitigate interest rate risk and address funding concentrations would have made the bank less vulnerable to the contagion event that began with the failure of Silicon Valley Bank.

Regulators seized First Republic in May, less than two months following the failure of SVB and Signature Bank. In its review, the FDIC cited an overreliance on uninsured deposits and a failure to sufficiently mitigate interest rate risk as factors attributing to its failure, with its ultimate downfall resulting from a loss in market and depositor confidence following the earlier bank failures. As for its actions, FDIC said supervisors in its San Francisco office could have been more “forward-looking” in their assessments of the institution. At the same time, most agency officials interviewed said the FDIC had adequate staffing for examinations.

The report ultimately didn’t take a position on what role FDIC supervision played in First Republic’s failure. However, the authors did have eight recommendations for areas of further study, including evaluating whether continuous examination process teams should place greater consideration and emphasis on unrealized losses and declines in fair value, and exploring potential processes and information sources for real-time monitoring of large bank reputational risk profiles.