The Federal Deposit Insurance Corp. acknowledged on Friday that it should have strengthened oversight of First Republic Bank before the lender’s failure in May.
(Bloomberg) — The Federal Deposit Insurance Corp. acknowledged on Friday that it should have strengthened oversight of First Republic Bank before the lender’s failure in May.
The FDIC said in a report that it didn’t appropriately take into account the bank’s high levels of uninsured deposits or vulnerability to changes in interest rates. The agency also said the amount of time examiners dedicated to the bank declined despite First Republic’s significant expansion.
First Republic’s failure on May 1 was the second biggest in US bank history. In a government-brokered deal, JPMorgan Chase & Co. bought the bank and entered into a loss-sharing agreement with the FDIC.
Like other regional lenders, the San Francisco-based bank found itself squeezed earlier this year after the Federal Reserve jacked up interest rates to fight inflation, hurting the value of bonds and loans that First Republic acquired when rates were low. Meanwhile depositors fled, first in search of better returns and then in fear, as worries spread about the bank’s health.
Read More: JPMorgan Ends First Republic’s Turmoil After FDIC Seizure
The FDIC said in its report that there were “opportunities for a more holistic approach to supervising the bank.” It added that “greater criticism of First Republic’s vulnerability to interest rate risk and reliance on a high level of uninsured deposits, may have also prompted a downgrade” to a key rating it gave the bank in 2021.
Between 2018 and 2023, the number of hours that FDIC examiners dedicated to First Republic fell 11%, the FDIC said. But the bank doubled in size over the same period, according to the regulator.
“While we would not expect examination hours to parallel asset growth and while there could be explanations such as examination efficiencies, on the surface, this trend appears counterintuitive and may have warranted greater explanation in annual supervisory plans,” the FDIC said.
FDIC Leadership
In a more holistic approach to supervision, the regulator’s Large Bank Supervision Branch and headquarters leadership could have taken a larger role to help challenge bank management’s assumptions and strategies, and bring a broader view of industry risks, according to the report.
It’s not clear that more oversight would have prevented the collapse of First Republic, the watchdog said. However, “meaningful action” to mitigate interest rate risk and address funding concentrations would have made the bank more resilient and less vulnerable to the stresses that roiled the sector in March, the FDIC said.
In addition to reviewing its supervision, the FDIC has proposed changes to the way banks are overseen, including stepped up resolution planning and more capital to offset losses.
Read More: US Unveils Plan to Hit More Banks With Debt Requirements
(Updates with details on examinations starting in seventh paragraph.)
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