May 1, 2023
The Washington Post recently published an article featuring Mark Williams, Master Lecturer of Finance, discussing the failure of First Republic bank.
Despite aggressive interest-rate increases by the Federal Reserve, First Republic had trouble managing the risks associated with this move. At a time when rates were low, the bank invested heavily in long-term assets such as mortgages and government securities. First Republic was left with lower interest rates on its assets after the Fed raised interest rates by nearly five percentage points over 14 months.
Mark states, “Poor risk management, billions in exposure to interest-rate-sensitive securities and an overreliance on non-FDIC-insured deposits made these banks extremely vulnerable to bank runs.”
Even though the latest failure will likely fuel questions about the health of the financial system, experts said it’s unlikely to recur as tragically as the 2008 crisis, when 12 of the 13 biggest financial institutions in the United States almost collapsed.