First Republic Bank of San Francisco received a CAMELS rating of “2” from 2018 up until its failure in May 2023, with its component Liquidity rating upgraded to “1” in 2021 despite its reliance on uninsured deposits, according to findings of a report released Friday by the Federal Deposit Insurance Corp. (FDIC).
The report released by the Federal Deposit Insurance Corp.’s (FDIC) chief risk officer said the the primary cause of the bank’s failure was “a loss of market and depositor confidence, resulting in a bank run” following the March 2023 failures of Silicon Valley Bank and Signature Bank. It said certain attributes of First Republic’s business model and management strategies made it more vulnerable to interest rate changes and the contagion that ensued following the failure of Silicon Valley Bank. It said these included:
- rapid growth and loan and funding concentrations;
- overreliance on uninsured deposits and depositor loyalty; and
- failure to sufficiently mitigate interest rate risk.
“For an institution of its size, sophistication, and risk profile, the bank should have taken additional proactive measures to mitigate interest rate risk,” the report states.
As for the agency’s supervision of the bank, the report states that the dedicated examination team assigned as part of a “continuous examination process” issued required examination products timely, generally positive examination ratings, and few supervisory recommendations.
It also said the FDIC “could have been more forward-looking in assessing how increasing interest rates could negatively impact the bank and could have done more to effectively challenge and encourage bank management to implement strategies to mitigate interest rate risk,” the agency said.
The report looks at more than exam ratings, tracing the execution of the institution’s supervision under a “continuous examination process” that involved the San Francisco region, with a team of dedicated examiners, and interaction with the large bank supervision branch in the central office.
The report shows that in the four-year period leading up to the bank’s failure, the FDIC assigned a composite “2” CAMELS rating, indicatingthe bank was overall in satisfactory condition. It said it assigned “1” component ratings for Asset Quality and Management, indicating that both were strong, and increased the Liquidity component rating to “1” in the 2021 ROE, indicating that liquidity levels and funds management practices were strong. The FDIC assigned “2” component ratings for Capital, Earnings, and Sensitivity to Market Risk, indicating that those areas were satisfactory.
It said First Republic’s primary interest rate risk mitigation strategy relied on continual growth to produce a consistent volume of loans priced at current interest rates. The report said the upgrade in the Liquidity component rating to “1” in 2021 was too generous and was “inconsistent with First Republic’s high level of uninsured deposits,” which examination reports identified as a funding concentration; and supervisory plans found to be potentially unstable.
“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,” according to the report.
The report offers eight items for further study focusing on FDIC examiner guidance and processes:
Guidance:
- Reiterate expectations and examiner resources for evaluating interest rate risk management during the continuous examination process (CEP).
- Previously reported – Consider the need for enhanced examination guidance related to supervising banks that are overly reliant on uninsured deposit funding or have concentrations in uninsured deposits.
- Evaluate whether CEP examination teams should place greater consideration and emphasis on unrealized losses and declines in fair value (in securities and in loans) and whether additional information fields should be required in Call Reports.
Processes:
- Previously reported – Continue to evaluate the CEP and implement necessary changes to ensure the CEP provides efficient, effective, and timely risk-based feedback to large banks, including interim CAMELS ratings, when appropriate.
- Previously reported – As part of item 4, evaluate existing CEP required deliverables and level-of-effort to prepare deliverables in relation to benefits derived. Look for opportunities to streamline program requirements and written deliverables.
- Explore opportunities for Large Bank Supervision (LBS) to provide horizontal and trend Large Insured Depository Institution (LIDI) information to examination teams for benchmarking and to provide a broader large bank perspective.
- Explore potential processes and information sources for real-time monitoring of large bank reputational risk profiles. Potential information sources could include bank share price tracking websites, short seller activity, and social media discussions.
- Confer with other CEP teams to see if they also experience delays in receiving information about bank board of director decisions and explore alternatives for obtaining decision information sooner.