FDIC Issues Bank Failure Post Mortem Report – Financial Services

Last week, the Federal Deposit Insurance Corporation
(“FDIC”) issued a report from its Chief Risk Officer
entitled FDIC’s Supervision of First Republic Bank.
The FDIC was First Republic Bank’s primary federal banking
agency, as First Republic was a state-nonmember bank. The report is
basically a post-mortem of the FDIC’s supervision of First
Republic leading up until its failure in May.

The FDIC’s report stated that the “primary cause of
First Republic’s failure was a loss of market and depositor
confidence, resulting in a bank run following the failure of
Silicon Valley Bank (SVB) and Signature Bank on March 10 and 12,
2023, respectively.” As we noted in May, a unique feature of these post-mortem
reports is that they include a great deal of supervisory material
that is usually not public and closely guarded as confidential
supervisory information. The FDIC’s report went on to state
that until April of 2023, First Republic had been well-rated with
the highest two ratings for all components in its CAMELS exam
reports. The FDIC went on to state that notwithstanding the
generally well run nature of First Republic, “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 following the failure of SVB.”
The FDIC noted three factors: (1) rapid growth and loan and funding
concentrations; (2) overreliance on uninsured deposits and
depositor loyalty; and (3) failure to sufficiently mitigate
interest rate risk.

The FDIC’s report concluded, even with the benefit of
hindsight, it’s unclear whether earlier supervisory action to
criticize First Republic’s interest rate or liquidity risk
management would have prevented the failure given the speed of
withdrawals following SVB’s failure. However, it noted
“meaningful action to mitigate interest rate risk and address
funding concentrations would have made the bank more resilient and
less vulnerable to the March 2023 contagion event.”

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