The FDIC missed opportunities to take earlier supervisory actions and downgrade First Republic Bank before its failure in May, according to a new report by the agency’s Office of the Inspector General. The report also concluded that given the speed at which deposits fled First Republic, the FDIC should reevaluate its assumptions and guidance pertaining to examinations and uninsured deposits.
The OIG hired the public accounting firm Cotton & Company to determine why First Republic’s failure led to a loss in the Deposit Insurance Fund and to evaluate the agency’s handling of the bank. It concluded that the bank’s failure was caused by contagion effects from the previous failures of Silicon Valley Bank and Signature Bank, leading to a run on First Republic’s deposits. Still, the FDIC identified increased liquidity risk at First Republic in the latter half of 2022, “but did not take timely action to downgrade the liquidity component rating from a ‘1’ to a ‘2’ prior to the first run on deposits,” the firm said. That said, given the nature of the bank run that brought down the bank, “FDIC supervisory actions may not have prevented First Republic’s failure.”
First Republic was well-capitalized throughout each examination cycle based on defined capital measures, but “the bank’s failure may warrant changes to the guidelines establishing standards for safety and soundness, including the adoption of noncapital triggers requiring regulatory actions,” the firm concluded. It recommended that the FDIC ensure examination guidance requires supervisory action when bank business practices “consistently deviate from policies, procedures or risk appetite metrics.” It also recommended that the agency assess whether a revision to examination guidance is warranted in the areas of uninsured deposits and bank contagion risk characteristics.