First collapse of 2024 not expected to bring trouble for banking industry

WASHINGTON (TND) — The U.S. had its first bank failure of 2024 with federal regulators seizing control of Pennsylvania-based Republic First over the weekend, which comes a year after a string of larger regional banks collapsed in spectacular fashion and fueled fears of a run on deposits and shook faith in the financial system.

The closure of Republic First marks the first failure of a Federal Deposit Insurance Corporation-insured bank of 2024 and comes after efforts to find a buyer for the bank fell through earlier in the year. According to the FDIC, the bank had about $6 billion in assets and $4 billion in deposits as of Jan. 31.

It is a significantly smaller bank than those that failed last year. Silicon Valley Bank, Signature Bank and First Republic Bank all had balance sheets totaling hundreds of billions. Federal regulators were also able to find a buyer in Fulton Financial, which means the FDIC won’t have to backstop deposits over the $250,000 limit like it did for two of 2023’s bank failures. Republic First’s failure is expected to cost the FDIC fund $667 million, the agency said.

The closure of Republic First comes after a string of bank failures last spring that sparked congressional and regulatory scrutiny amid concerns about faith in the banking system being shaken and investigations finding rampant mismanagement of risk at banks holding tens of billions in deposits and assets.

Industry analysts aren’t anticipating more widespread trouble despite the closure of Republic First, but there are still several risks hanging over regional-sized banks. Only a handful of banks in the U.S. typically close under a strong economy.

A Fed review of the collapse of SVB found a combination of very poor risk management, weaker regulations and lax government supervision all contributed to its collapse and sparked the run on Signature and First Republic.

Republic First suffered from some of the same ailments as the regional banks that collapsed last year, including losses on bonds that lost value with higher interest rates and elevated rates of uninsured deposits that can quickly be removed and sent to money center banks like JPMorgan Chase.

The biggest risk from the 2023 failures was the risk of contagion, which would lead to a run on deposits like what happened to SVB and spark a broader crisis in the banking sector that would result in a larger run of failures. Those concerns did not come to pass but regulators and lawmakers in Congress have also ramped up scrutiny of how banks are operating and what kind of risk management they are performing.

“Banks, by and large, are in reasonably better shape than they than they were a year ago,” said Cliff Rossi, a professor of finance at the University of Maryland’s Robert H. Smith School of Business who also worked in high levels of risk management for several large banks. “I don't expect another March 2023 imminent at any point.”

The Federal Reserve, which oversees banks, is also considering numerous proposals to create a stricter regulatory environment including higher cash reserves to cover losses.

The most pressing risk for banks is a high interest rate environment that doesn’t appear to be easing anytime soon as the Federal Reserve tries to bring inflation under control. Economists and investors have scaled back expectations about potential rate cuts this year as inflation has remained sticky and the economy continues to be relatively healthy overall.

Commercial real estate, especially office buildings, have also created higher risks for regional and community banks that are seeing lower property values and higher interest rates.

“There's a higher probability that we will see more bank failures simply because banks are not used to being in this kind of an interest rate environment,” Rossi said. “Most of the management teams and boards that are out there have not lived through this, so they were caught off guard and all of their interest rate risk practices, and I think the same was true, quite honestly about the regulators, too.”