FDIC says it should have supervised First Republic more closely

By Pete Schroeder

WASHINGTON (Reuters) -The Federal Deposit Insurance Corp should have been more aggressive in policing First Republic Bank (OTC:FRCB)'s risk management prior to its May failure, but it was unclear if that would have saved it given the speed with which depositors yanked their money, the agency said.

FDIC said in a report published Friday that a loss of market and depositor confidence ultimately sank the California-based lender, which was the second-largest bank to collapse in U.S. history.

It also laid blame at the feet of bank executives and its board, which it said ignored warning signs that interest rate risk was getting out of hand.

However, the FDIC added that its supervisors were too "generous" in gauging some of First Republic's risks, notably around interest rates and uninsured deposits. Over a period when the bank doubled in size, the regulator found the time its supervisors actually spent at the lender declined, raising questions about how the agency allocated its staff.

"In retrospect, it does not appear that banks or banking regulators had sufficient appreciation for the risks that large concentrations of uninsured deposits could present in a social media-fueled liquidity event," the regulator wrote.

First Republic was the third bank to collapse in a matter of weeks, after a tumultuous period for the sector that began with the abrupt failure of Silicon Valley Bank in March. First Republic was subsequently seized by the FDIC and most of its assets sold to JPMorgan Chase (NYSE:JPM).

Friday's report echoed similar findings by regulators on the failures of SVB and New York-based Signature Bank (OTC:SBNY) and is likely to increase pressure on regulators to crack down on the industry.

The Federal Reserve said its supervisors did not escalate concerns quickly enough and did not provide enough resources.

Similarly, the FDIC found in its April post-mortem of the Signature failure that the agency lacked resources to properly supervise the bank as management pursued an overly aggressive growth strategy.

U.S. regulators have sought to tighten rules for larger banks, issuing several sweeping proposals aimed at bolstering lenders' ability to withstand economic shocks and continue lending.

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But the banking industry and Republicans in Congress have called such efforts misguided, arguing tougher supervision of existing rules is needed, not new requirements - an argument some advocates of tighter regulation rebutted on Friday.

"Both regulation and supervision must be strengthened," said CEO Dennis Kelleher of Better Markets, a group favoring tougher regulation, in response to the report.