The Bank Slate


OIG: First Republic failure highlights need for new assumptions

First Republic Bank’s failure has raised questions about regulators’ assumptions for uninsured deposits and the non-capital triggers for agency intervention.

The San Francisco bank was closed in May after several waves of deposit outflows after the high-profile failures of Silicon Valley Bank and Signature Bank two months earlier.

A material loss review conducted by Cotton & Company Assurance and Advisory for the Federal Deposit Insurance Corp. Office of Inspector General found that earlier supervisory action may have caused the $233 billion-asset bank “to take corrective action” to reduce “its susceptibility to contagion risk.”

The report also suggested that earlier intervention may have reduced the failure’s hit to the Deposit Insurance Fund, estimated at $13 billion at the time of the bank’s closure.

“The FDIC missed opportunities to take earlier supervisory actions and downgrade … component ratings consistent with the FDIC’s forward-looking supervisory approach,” the report said.

While the agency identified increasing liquidity risk in the second half of 2022, it failed to take timely action to downgrade the liquidity component of the bank’s CAMELS rating before the initial deposit run.

The “magnitude and velocity” of uninsured deposit outflows merits a deeper dive and a possible shift in guidance, the report said. The OIG also suggested potential changes in guidance tied to safety and soundness standards, noting that the bank was well-capitalized during each exam prior to its collapse.

The FDIC, in its own 63-page report released in September, found that the liquidity risk management component of the bank’s CAMELS rating was “too generous” prior to its failure.

The agency noted that the bank’s business model and management strategies made it vulnerable to interest rate changes and the bank run that followed the failure of Silicon Valley Bank.

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