FDIC Acknowledges Oversight Failures in Handling First Republic Bank's Collapse

The Federal Deposit Insurance Corp. (FDIC) has publicly admitted to shortcomings in its oversight of First Republic Bank, the regional lender that collapsed and was subsequently acquired by JPMorgan Chase in May. In a comprehensive 62-page review, the regulator conceded that its supervisors could have taken more proactive measures to address factors that left First Republic vulnerable to severe contagion effects, such as its high level of uninsured deposits and exposure to rising interest rates.

First Republic Bank's demise, which marked the second-largest bank failure in U.S. history, occurred during a tumultuous period in the financial sector, coinciding with the collapses of Silicon Valley Bank and Signature Bank in March.

The FDIC's post-mortem review of its oversight of First Republic highlighted "opportunities for a more holistic approach to supervising the bank." While it remains uncertain whether earlier supervisory actions would have averted the bank's failure, the report stressed that taking meaningful steps to mitigate interest rate risk and address funding concentrations could have made the bank more resilient and less susceptible to the events leading to its collapse.

The bank's depositors began withdrawing funds rapidly due to concerns following the failures of regional lenders SVB and Signature. While First Republic initially managed liquidity to meet withdrawal requests, the FDIC attributed the loss of depositor confidence and the constrained options for the bank to restructure its balance sheet to management's strategic decision to retain a business model with a significant asset/liability mismatch amid rising interest rates.

The FDIC also noted that First Republic experienced rapid growth in the years leading up to its collapse. This growth coincided with a decline in FDIC examination hours. The report raised questions about the decrease in examination hours, considering the bank's expansion.

Furthermore, the FDIC criticized its own decision in 2021 to award the bank top ratings for liquidity risk management, deeming it "too generous" and inconsistent with First Republic's high level of uninsured deposits. The report suggested that more substantial criticism of the bank's vulnerability to interest rate risk and reliance on uninsured deposits might have prompted a downgrade.

This review comes in the context of regulatory proposals for new capital requirements, long-term debt, and resolution plans for banks, measures aimed at strengthening the financial system and preventing future bank failures.

Criticism of the FDIC's handling of First Republic's post-failure resolution was also discussed during an FDIC board meeting. Board member Jonathan McKernan suggested that the board should have held a vote on the decision to sell First Republic to JPMorgan Chase, emphasizing that an on-the-record vote would enhance accountability and transparency. However, some board members expressed concerns that requiring a board vote could impede the FDIC's ability to resolve such situations efficiently, given the complexities involved.

In conclusion, the FDIC's admission of oversight failures in the First Republic Bank case underscores the need for a more comprehensive approach to bank supervision and regulatory actions that prioritize stability in the face of potential vulnerabilities and contagion effects. The review also raises questions about transparency and accountability in the resolution process for failed banks.