Ex-First Republic CEO points to banking contagion as cause of collapse

In an unexpected turn of events, the former CEO of First Republic Bank, Michael Roffler, attributed the bank’s unprecedented downfall to the ripple effects of the collapse of other regional banks. Testifying before the Senate Banking Committee on Wednesday, Roffler painted a picture of a financial institution caught in an industry-wide panic, leading to a staggering withdrawal of over $100 billion deposits within a few weeks.

Roffler stated, “The unforeseen failures of Silicon Valley Bank and Signature Bank were the catalysts that instigated substantial deposit outflows from our bank.” The impact of these collapses, which was far-reaching and almost immediate, was a scenario that First Republic Bank had not envisioned.

Despite regular reviews of First Republic’s financial position and strategy by the California Department of Financial Protection and Innovation (DFPI) and the Federal Deposit Insurance Corporation (FDIC), the bank needed help to withstand the sudden onslaught. On May 1, California banking regulators intervened, marking the end of First Republic Bank and selling its assets to JPMorgan Chase & Co (JPM.N). This marked the largest U.S. bank failure since the 2008 financial crisis, casting a shadow on the persistent banking turmoil.

A domino effect in the banking industry

In the lead-up to the collapse, Roffler contends that First Republic Bank was aware of and disclosed the earnings risks it grappled with in 2023. However, the swift fall of other regional banks and the resulting impact on consumer confidence was a disaster for which the bank was unprepared.

“No one at First Republic could have predicted the pace at which these events unfolded, or the catastrophic effects these events had on the banking industry and consumer confidence,” Roffler said, emphasizing the magnitude of the crisis.

JPMorgan Chase & Co’s acquisition of First Republic Bank followed its status as the second-largest bank failure in U.S. history and the fourth regional bank to collapse this year. Like many regional lenders, First Republic Bank found itself cornered by higher interest rates that depreciated the value of its bond holdings, initially purchased during a period of significantly lower borrowing costs.

Roffler’s narrative paints a sobering picture of the banking industry’s vulnerability to unexpected shocks and the need for robust contingency planning.

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