The Federal Deposit Insurance Corporation (FDIC) has released a report on Friday that analyzes the causes and consequences of the failure of First Republic Bank, one of the largest banks in the U.S. The report admits that the FDIC could have done more to prevent the collapse of the bank, which was acquired by JPMorgan Chase in May 2023.
First Republic Bank’s rapid growth and interest rate risk
According to the report, First Republic Bank had a business model that relied heavily on low-cost funding and continual growth. The bank offered lower-rate, longer-duration loans to high-net-worth individuals and businesses, mainly in the real estate sector. The bank also had a high concentration of uninsured deposits, which made it vulnerable to liquidity shocks.
The report states that the FDIC failed to adequately assess the interest rate risk and risks associated with rapid growth and uninsured deposits in its examinations of First Republic Bank in the years prior to its failure. The FDIC did not challenge or encourage the bank management to implement strategies to mitigate interest rate risk, such as diversifying its loan portfolio, hedging its interest rate exposure, or reducing its reliance on uninsured deposits.
The report also notes that the FDIC did not pursue a more urgent supervisory response, such as downgrading the bank’s rating or issuing supervisory recommendations, when the interest rate environment changed significantly in 2022. The Federal Reserve raised its benchmark interest rate several times in 2022 and 2023, which increased the cost of funding for First Republic Bank and reduced the demand for its loans. The bank also faced increased competition from other lenders who offered higher rates and shorter terms.
First Republic Bank’s failure and acquisition
The report reveals that First Republic Bank experienced a severe liquidity crisis in April 2023, when a large number of depositors withdrew their funds from the bank. The bank also faced margin calls from its creditors, who demanded more collateral for their loans. The bank was unable to meet its obligations and requested emergency assistance from the FDIC.
The FDIC decided to facilitate the sale of First Republic Bank to JPMorgan Chase, which submitted a bid for all of the bank’s deposits and substantially all of its assets. The deal was announced on May 1, 2023, and completed on the same day. The FDIC said that the deal avoided the use of its emergency powers and minimized disruptions for customers. JPMorgan Chase agreed to assume all of the deposits and operate all of the branches of First Republic Bank.
The report estimates that the failure of First Republic Bank will cost the FDIC’s Deposit Insurance Fund (DIF) about $4.2 billion. The report also states that the FDIC will conduct a comprehensive review of its supervisory processes and practices to identify areas for improvement and prevent similar failures in the future.
President Biden’s reaction to the report
President Joe Biden commented on the report at a press conference at the White House on Friday. He said that he applauded the government effort to take over and sell First Republic Bank and ensure that all depositors were protected and taxpayers were not on the hook. He also said that these actions were going to make sure that the banking system was safe and sound.
Biden also said that his administration was working with Congress to pass legislation that would strengthen financial regulation and oversight, as well as support economic recovery and growth. He said that he was confident that the U.S. economy would bounce back from the challenges posed by the pandemic and climate change.