WASHINGTON — The costly resolution anticipated for the failed First Republic Bank increases the odds that banks will have to pay higher deposit insurance premiums and a heavier special assessment — and diminishes the prospect that community banks will be off the hook, industry observers say.
The seizure and sale of the San Francisco-based bank is the latest in a string of failures this year, following the collapse of Silicon Valley Bank and Signature Bank in March. Unlike the prior two episodes, however, regulators were able to find a buyer for First Republic over the course of a weekend, allowing the bank to open as scheduled on Monday.
But the sale includes a cost-sharing agreement between JPMorgan and Federal Deposit Insurance Corp. on certain loans in First Republic's former portfolio that the agency expects to contribute to a $13 billion hit to the Deposit Insurance Fund. Combined with the $22.5 billion of losses incurred on the failures of Silicon Valley and Signature banks, the DIF will be down roughly $35 billion on the year, and the FDIC will have to pass those costs on to banks one way or another.
"This is going to be an interesting circumstance going forward," said Kathryn Judge, a law professor at Columbia University who specializes in financial regulation. "We have both a special assessment arising from the systemic risk exception and the need to replenish the DIF because it's fallen below the minimum. I would expect the FDIC to look at each of those challenges in connection with the other in proposing a course forward."
The Deposit Insurance Fund had been a topic of concern for the FDIC before any of this spring's bank failures, with the agency approving increases to premiums banks pay for deposit insurance based on the influx of deposits banks took during the pandemic. The hit to the DIF from the First Republic deal likely means those heightened premiums are here to stay, according to Jaret Seiberg, Washington policy analyst at TD Cowen.
"This $13 billion loss likely eliminates any prospect that the agency would delay the 2-basis-point hike in deposit insurance premiums that is effective with the June 30 billing cycle," Seiberg said in a policy note.
Former FDIC lawyer Todd Phillips said the First Republic deal could also affect the FDIC's forthcoming special assessment to replenish the DIF after Silicon Valley Bank and Signature Bank's failures. While the special assessment was meant to replenish the fund because of the March bank failures, the FDIC may try to tack on the First Republic losses in the same stroke.
"Because the FDIC didn't use its systemic risk exception, it doesn't need to do a new special assessment," he noted, "That said, because it's already doing one thanks to SVB's and [Signature's] failures, it may attempt to use that special assessment to backfill the hole left by FRB's sale. But it's really unclear what they'll do."
Small banks have already lobbied hard against paying into a special assessment to make up for the losses caused by Silicon Valley Bank and Signature Bank,
Jenna Burke, senior vice president and regulatory counsel for the Independent Community Bankers of America, said that same principle applies to any potential increases in deposit insurance premiums in the wake of First Republic's failure. She suggested that any increase to smaller bank premiums is unwarranted, and that any rule changes considered should focus on ensuring assessment fees correspond to the risk an institution poses.
"The bottom line is community banks should never have to pay for the failures or bailouts of the very largest banks — whether that is through increases to their base deposit insurance assessments or special assessments," Burke said. "The FDIC needs to take a commonsense approach to deposit insurance premiums to ensure small banks are not forced to subsidize large bank risks — the FDIC should ensure its approach to assessments is consistent and proportionate to bank asset size and systemic risk."
But other experts say that, given the variety of systemic benefits chartered institutions enjoy, all banks should pay to prop up a failed one. David Zaring, professor of legal studies and business ethics at the University of Pennsylvania's Wharton School of Business, said that with great benefits comes great costs.
"I think it's great when banks have to monitor one another. I think the banking industry gets a lot out of the guarantee of deposit insurance and the industry should ratably pay for the privilege," Zaring said. "I'm not of the view that small banks shouldn't participate in their insurance fund, too. I just don't think it works that way with other private insurers. If they sustain losses in a hurricane, the policyholders all take a hit rather than just the wealthy policyholders."
