A U.S. banking regulator said its supervisors could have been more aggressive in policing First Republic Bank's risk management prior to its May failure, but it was unclear if that would have saved the bank in the face of the unexpected speed that depositors pulled their money.
The Federal Deposit Insurance Corporation (FDIC) said in a new report published Friday that a loss of market and depositor confidence ultimately sank the bank.
However, it added bank supervisors were too "generous" in gauging some of its risks, notably around interest rates and a high level of uninsured deposits. The regulator found its supervisors actually spent less time at the bank from 2018 to 2023, a period in which the firm doubled in size.
First Republic's failure at the beginning of May was the third bank collapse in a matter of weeks, after a tumultuous period that kicked off with the abrupt failure of Silicon Valley Bank in March. First Republic's collapse, which saw the bank seized by regulators and most of its assets sold to JPMorgan Chase (JPM.N), was the second largest bank failure in American history.
The 63-page review of the FDIC's supervision of the bank does not ultimately conclude whether the bank would have survived with stricter oversight, noting the "unexpected" speed at which depositors fled banks.
It however said the bank likely would have been more resilient to the spreading panic had supervisors criticized bank management practices sooner.
"It is much easier to suggest what examiners should have done, once one has a full understanding of the events that actually happened and how they diverged from historical norms," the agency said in its report.
The FDIC ultimately found that its supervision team was timely in examining First Republic and producing its findings.
It acknowledged though that field supervisors may have benefited from a more "holistic" approach, including more input from large bank experts and leadership in Washington who could have more effectively challenged bank management.
The FDIC said in its report that supervisors could have challenged the bank's plan to mitigate interest rate risk through continued growth starting in the second half of 2021.
But it admitted such criticism would have been met with "pushback" from the bank, given its strong growth and low interest rates at the time.
