First Republic fallout: Democrats fume as regulators bail out yet another failed bank

Democrats are banging a gong about the need for greater regulation of the U.S. financial sector following the combined public and private-sector rescue of California-based First Republic Bank.

The San Francisco-based regional powerhouse is the third major U.S. bank to fail and prompt a government-administered bailout of depositors following the collapse of Silicon Valley Bank (SVB) and Signature Bank in March. It is the second-largest bank collapse in U.S. history, eclipsing SVB.

While Democrats aren’t arguing that the Biden administration should have let First Republic fail, many are concerned that the current spate of bank rescues point to financial stability concerns.

“First Republic Bank’s risky behavior, unique business model, and management failures led to significant problems, and it’s clear we need stronger guardrails in place. We must make large banks more resilient against failure so that we protect financial stability and ensure competition in the long run,” Senate Banking Committee Chairman Sherrod Brown (D-Ohio) said in a statement on Monday morning.

Cleaning up First Republic’s collapse will cost the FDIC roughly $13 billion from the Deposit Insurance Fund (DIF), a pool of money funded by bank fees that exists to protect deposits. The FDIC already tapped $22.5 from the DIF to handle the collapses of SVB and Signature in March, though the fund had roughly $128 billion in it at the end of 2022.

JPMorgan Chase will also receive a $50 billion in fixed-rate financing as it takes on First Republic’s assets, outstanding loans and deposits in the form of a promissory note, a representative for the FDIC told The Hill.

Sen. Elizabeth Warren (D-Mass.), a fierce critic of big banks, emphasized that the FDIC bailout of First Republic once again puts taxpayer money on the line. That’s after $25 billion was used from the Treasury’s Exchange Stabilization Fund to backstop a loan for the rescue of depositors at Silicon Valley Bank in March.

“The failure of First Republic Bank shows how deregulation has made the too-big-to-fail problem even worse. A poorly supervised bank was snapped up by an even bigger bank—ultimately taxpayers will be on the hook. Congress needs to make major reforms to fix a broken banking system,” she wrote online on Monday.

Other top Democrats on financial committees defended the actions of the Biden administration while also encouraging banking sector reforms.

“This prompt and cost-effective sale of the bank protects depositors, limits contagion, and ensures that no cost is borne to our nation’s taxpayers,” Rep. Maxine Waters (D-Calif.), the top Democrat on the House Financial Services Committee, said in a statement on Monday.

A growing to-do list for lawmakers

First Republic’s failure comes as lawmakers and regulators are still investigating the collapses of SVB and Signature banks.

“You have got to blame the regulators,” House Financial Services Committee member Rep. Brad Sherman (D-Calif.) told The Hill in an interview. “If anybody should appreciate interest rate risk, it’s the people who push the interest rates up.”

Waters also noted reports released Friday by the Federal Reserve and Government Accountability Office (GAO) that found both Fed regulators and bank managers were to blame for the collapse of venture capital repository Silicon Valley Bank and cryptocurrency-focused Signature Bank.

“These developments coupled with the reports we received from the Federal Reserve, FDIC, and GAO on recent bank failures also underscore the need for Congress and regulators to strengthen regulation and supervision of regional banks,” she said.

The frustration over yet more bank failures and government caretaking wasn’t limited to Democrats on Monday. Republicans and even a regulator at the FDIC bemoaned the country’s “bailout culture.”

“We should plan for those bank failures by focusing on strong capital requirements and an effective resolution framework as our best hope for eventually ending our country’s bailout culture that privatizes gains while socializing losses,” FDIC board member Jonathan McKernan wrote in a statement on Monday.

“Bank failures are inevitable in a dynamic and innovative financial system,” McKernan said.

We’re not out of the woods yet

Experts are cautioning that the period of bank failures may be far from over and that its effects upon the wider economy, specifically through credit conditions, may not yet be fully understood. The Fed itself issued a similar warning in March after the most recent meeting of its interest rate-setting committee.

“As all too few of us predicted in early March, the ongoing concentration of U.S. banking into a few one-size-fits-all Wall Street institutions continues apace, with our largest banking conglomerate – JP Morgan Chase – now having purchased yet another large regional bank on the cheap with federal assistance,” Robert Hockett, a professor of law and public finance at Cornell Law School, wrote in an analysis.

“Contrary to cheery Wall Street and Washington predictions made over the weekend, this is not ‘the end of the March banking crisis’ – it is still the beginning,” he wrote.

What the purchase of First Republic means for the future of the banking industry and whether the big banks will simply be allowed to get bigger is also uncertain.

“The fact that the most gigantic U.S. bank was needed to bail out a large bank kills a lot of hopes and plans. Since the 2008 financial crisis regulators have tried to prevent the biggest banks from becoming more dominant,” analysts with policy research firm Capital Alpha Partners wrote in a Monday analysis.

“JPMorgan never would have received regulatory approval to purchase a healthy bank of First Republic’s size. JPM will now get bigger due to its role of savior of last resort.”