First Republic, like several distressed regional lenders, found itself in turbulent waters when the Federal Reserve escalated interest rates to combat inflation. This move adversely affected the value of bonds and loans that First Republic had acquired during a period of lower rates. The subsequent fallout saw depositors withdrawing in search of better returns and, later, out of growing concerns about the bank’s stability.
“Given the size and scale of First Republic’s operations, we concluded there were opportunities for the FDIC to take a more holistic approach to supervising the bank,” the FDIC said in its report.
The agency also added that its decision to give the bank a strong liquidity rating in 2021 was “too generous and was inconsistent with First Republic’s high level of uninsured deposits.”
“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 the bank’s management component rating in the 2021 roll-up ROE,” the FDIC said.
Another striking revelation was the 11% decline in the FDIC’s examination hours dedicated to First Republic from 2018 to 2023, during which the bank’s size doubled. Addressing this anomaly, the FDIC observed that such a trend “appears counterintuitive and may have warranted greater explanation in annual Supervisory Plans.”