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First Republic Failure is the Bitter Harvest of Financial Deregulation

WASHINGTON, D.C. – Federal regulators are expected to close First Republic Bank today, the bitter harvest of financial deregulation that spurred the bank to grow beyond its means. First Republic has been under pressure since the collapse of Silicon Valley Bank and Signature Bank, which raised concerns about the soundness of other regional banks.

Based in San Francisco, First Republic focused on high net-worth individuals and their businesses, including offering mortgages at low interest rates to those customers. These mortgages and other long-term assets have fallen in market value since the Federal Reserve began hiking interest rates in 2022, leading investors to worry that First Republic might book catastrophic losses if forced to sell those assets to raise cash.

First Republic received a brief respite when 11 large U.S. banks injected $30 billion in deposits. But this week, the bank told investors that it had seen an outflow of deposits since mid-March worth more than $100 billion. First Republic’s share price has fallen more than 95% over that period, erasing roughly $22 billion from its market valuation. The bank’s closure would bring an end to this saga.

“Once again, we’re reaping the bitter harvest of financial deregulation,” said Lisa Gilbert, executive vice president of Public Citizen. “Congress was wrong to approve S. 2155, which invited banks to grow recklessly, and must reverse this dangerous law. Once a stodgy bank, S. 2155 spurred First Republic to grow too fast.”

S. 2155, approved in 2016, changed from the minimum size of a bank subject to “enhanced supervision” from assets of $50 billion to $250 billion. Enhanced supervision refers to stricter capital rules, more frequent stress tests, and other cautions to arrest reckless behavior and prevent failure.

“Bankers at First Republic make reckless decisions, encouraged by bad pay-related incentives,” said Bart Naylor, financial policy advocate for Public Citizen. “Lawmakers understood this was a problem throughout the industry following the 2008 financial crash and required a rule to stop it. But dangerously, that rule has not yet been implemented. With the failure of First Republic following the failure of Silicon Valley Bank, regulators must reform banker pay immediately.”

Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act is one of about 400 rules authorized by the law. Specifically, it requires regulators to prevent banks from establishing compensation structures that incentivize “inappropriate” risk-taking. It is one of only a few rules for which Congress imposed a deadline, May 2011, signifying the importance and urgency of this reform. But the rule has never been finalized.

“Regulators should force senior bankers to defer pay into a collective fund, and that fund must be at risk to cover the cost of failures or penalties from misconduct fines,” Naylor added. “The genius of this idea is that it deputizes bankers to police one another. Earlier this week, leading members of Congress called on regulators to do just that.”