The financial landscape faced another jolt this year when First Republic Bank teetered on the brink of collapse. But as fingers are pointed and accountability sought, the Federal Deposit Insurance Corporation (FDIC) admits its role in the debacle.
A Missed Beat in Regulation
California’s gem, First Republic, once the epitome of banking prowess, spiraled into chaos, culminating in its near-demise this year. The root cause? A lack of confidence in the market and among depositors. While some could argue this was an unforeseeable domino effect initiated by the downfall of Silicon Valley Bank earlier in March, the FDIC’s recent introspection revealed something more telling: they could’ve intervened but didn’t.
The FDIC’s report laid bare some unsettling truths. First Republic’s vulnerability wasn’t a secret. Its rapid expansion, heavy reliance on uninsured deposits, and a failure to effectively counteract interest rate risks were red flags the FDIC should have caught. In fact, it was this very unchecked growth and overconfidence in First Republic’s strategies that proved to be its Achilles heel.
FDIC’s Grading Curve: Too Lenient?
In 2021, when the signs were clear that interest rates were about to shift, First Republic’s management believed they could grow their way out of any looming crisis. But growth isn’t always the answer, and this over-reliance on expansion was its downfall. In the FDIC’s books, however, the bank got top ratings for liquidity risk management the same year—a decision now deemed overly generous, given First Republic’s glaring over-dependence on uninsured deposits.
The disparity in the FDIC’s supervisory hours versus First Republic’s growth further highlights the oversight issue. Between 2018 and 2023, as First Republic’s assets soared, doubling to an impressive $233bn, the hours the FDIC dedicated to supervising the bank reduced by 11%. This mismatch in supervisory commitment amidst such exponential growth is more than just an oversight; it’s a glaring omission.
But was it all FDIC’s fault? Maybe not entirely. Their report does clarify that while the regulatory body might have missed the mark in a few areas, significant regulatory concerns hadn’t been overlooked. However, this isn’t a get-out-of-jail-free card. A more proactive approach by the FDIC might not have saved First Republic from its fate, but it would have made the bank more resilient in the face of the financial storm that hit in March 2023.
The banking sector’s tumultuous period, kick-started by the Silicon Valley Bank’s sudden failure, caught many off guard. First Republic, though the third bank to crumble in a short span, wasn’t an isolated incident. Both SVB and New York’s Signature Bank faced similar regulatory oversights, intensifying the pressure on regulators to beef up industry scrutiny.
And while the FDIC’s candid acknowledgment of its oversights with First Republic and proposed changes to bank supervision are steps in the right direction, it’s clear that the road ahead demands more than just introspection. The call from industry experts and groups like Better Markets is unambiguous: both regulation and supervision need strengthening.
In the end, First Republic’s tale is a cautionary one. A reminder that unchecked growth, a misaligned regulatory body, and overconfidence can form a treacherous mix, leading even the mightiest institutions towards an untimely downfall.
