First Republic’s failure shows need for reforming bank CEO pay
First Republic Bank FRC became the second-biggest bank failure in U.S. history after the lender was seized by the Federal Deposit Insurance Corp. and sold to JPMorgan Chase JPM on May 1. First Republic is the latest victim of the panic that has roiled small- and midsize banks since the failure of Silicon Valley Bank last March.
The Federal Reserve’s top regulator seems to agree. On April 28, the central bank’s vice chair for supervision delivered a stinging report on the collapse of Silicon Valley Bank, blaming its failures on its weak risk management, as well as supervisory missteps. The so-called S&L crisis, like the collapse of SVB, began in a rapidly changing interest-rate environment. Savings and loan banks, also known as thrifts, provided home loans at attractive interest rates. When the Federal Reserve under Chairman Paul Volcker aggressively raised rates in the late 1970s to fight raging inflation, S&Ls were suddenly earning less on fixed-rate mortgages while having to pay higher interest to attract depositors. At one point, their losses topped $100 billion.
At all levels of mortgage financing — from Main Street lenders to Wall Street investment firms — executives prospered by taking excessive risks and passing them to someone else. Lenders passed mortgages made to people who could not afford them onto Wall Street firms, which in turn bundled those into securities to sell to investors. It all came crashing down when the housing bubble burst, followed by a wave of foreclosures.
A familiar ring That brings us back to Silicon Valley Bank. Executives tied up the bank’s assets in long-term Treasury and mortgage-backed securities, failing to protect against rising interest rates that would undermine the value of these assets. The interest rate risk was particularly acute for SVB, since a large share of depositors were startups, whose finances depend on investors’ access to cheap money.
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