Exclusive: US FDIC Investigating Former First Republic Bank Directors and Officers, According to Reuters

By Douglas Gillison and Chris Prentice

The Federal Deposit Insurance Corporation (FDIC) is investigating potential misconduct by executives and board members of First Republic Bank, which raises the possibility of significant penalties for the failed bank’s former leaders.

A spokesperson confirmed to Reuters that a probe into the directors and officers of First Republic is underway, although further details were not provided. This investigation is the third initiated by the FDIC in response to bank failures this year, which have cost the federal government’s deposit insurance fund approximately $32 billion.

FDIC Chairman Martin Gruenberg previously announced in March that the agency is also examining possible misconduct in connection with the failures of Silicon Valley Bank and Signature Bank. However, updates on those investigations have not been shared.

The three banks, which together managed over half a trillion dollars in assets, collapsed after experiencing runs on deposits. Regulators indicated these banks exhibited weak risk management practices and maintained high levels of uninsured deposits.

Similar to the cases with SVB and Signature Bank, the FDIC is looking into whether First Republic’s executives and board members violated rules requiring them to act in the bank’s best interests. Under federal law, the FDIC can prohibit former directors and officers from working in the banking sector and impose financial penalties for breaches of fiduciary duty or for unsafe practices that demonstrate dishonesty or a “willful or continuing disregard” for the bank’s wellbeing.

Former First Republic CEO Michael Roffler and former Executive Chairman James Herbert were not immediately available for comment, nor did attorneys for the bank’s independent board members respond to inquiries.

In May, Roffler testified before Congress that regulators had not raised concerns about the bank’s strategy or management, attributing the bank’s rapid deterioration to depositor panic resulting from the failures of SVB and Signature Bank.

While FDIC probes of bank failures are standard procedure and not necessarily indicative of wrongdoing, this investigation contributes to the increasing regulatory scrutiny facing the leadership of the failed institutions.

Additionally, the U.S. Justice Department and Securities and Exchange Commission are examining stock trades and public statements made by First Republic leading up to its collapse. Massachusetts regulators are also looking into stock sales by insiders at First Republic.

Former executives of SVB and Signature Bank have denied any wrongdoing or mismanagement during their time in charge.

The collapses of SVB and Signature Bank in March triggered a deposit run at First Republic, which ultimately failed in May and was sold to JPMorgan Chase. This marked the largest bank failure since the 2007-2009 global financial crisis. JPMorgan declined to comment on the situation.

First Republic was particularly susceptible to failure due to its reliance on uninsured deposits, rapid loan growth, concentrated funding strategies that heightened risk, and inadequate planning for potential sharp increases in interest rates, according to the FDIC.

In a September report, the FDIC pointed out that in late 2022, First Republic’s board made decisions to take no action in response to significant risk warnings, raising concerns among FDIC supervisors regarding the bank’s lack of urgency in addressing these issues. One risk model indicated that a 200 basis-point increase in interest rates could entirely eliminate the bank’s equity.

As interest rates rose throughout 2022, First Republic experienced increasing unrealized losses in its loan portfolio, surpassing its equity levels and ultimately eroding public confidence, which contributed to the bank run, the FDIC noted.

In previous cases, the FDIC has required directors of failed banks to financially contribute to replenishing the deposit insurance fund through personal restitution or by utilizing funds from their liability insurance. Since 2008, the FDIC has recouped over $4.4 billion from directors and officers of more than 500 failed banks.

The most severe penalty the FDIC can impose is a ban on individuals from working in the banking industry, which is typically reserved for the most egregious cases. FDIC investigations into bank failures can often take several years to conclude.

In a notable case, the FDIC banned former IndyMac CEO Michael Perry from the banking industry four years after the bank’s failure in 2008, citing negligence. Following a settlement, the FDIC, which incurred nearly $13 billion in losses from IndyMac’s failure, received an $11 million insurance payout and $1 million from Perry’s personal assets, although his legal representatives claimed he “steadfastly denied” the allegations.