As regulators reveal why SVB and Signature Bank failed, First Republic teeters on the brink

Stocks rose for the second consecutive trading session and ended the week up as fears about the health of First Republic Bank continued to loom over Wall Street.

The S&P 500, Nasdaq Composite and Dow rose for the month, with the blue-chip index marking its best monthly gain since January.

For the week, the Dow gained 289 points, or 0.9%, the S&P 500 added 0.9% and the Nasdaq Composite ticked up 1.3%.

Shares of First Republic dropped 43% on Friday, reaching record lows after reports swirled that the regional lender is likely headed for receivership by the FDIC. Shares of the embattled lender are down 97% this year.

Meanwhile, shares of Snap fell 17% on Friday after the company reported its first quarterly sales decline since going public in 2017.

Amazon stock slid about 4% after the e-commerce giant reported a slowdown in its cloud business.

Investors also digested two highly anticipated reports from federal regulators on the events that led up to the collapses of Silicon Valley Bank and Signature Bank. Regulators pointed out flaws in the banks' management as well as in their own processes for overseeing them.

With Big Tech and bank earnings largely out of the way, investors are focusing on the Federal Reserve's next interest rate decision set to be announced Wednesday. Analysts expect the bank to raise rates by a quarter point.

Federal Reserve Chairman Jerome Powell will likely face questions about the central bank's plans for the rest of the year in his press conference that same day — as well as questions about tighter credit conditions, as the chaos surrounding First Republic news renews banking fears.

The Dow rose 272 points, or 0.8%.

The S&P 500 gained 0.8%.

The Nasdaq Composite advanced 0.7%.

As stocks settle after the trading day, levels might still change slightly.

Dennis Kelleher, CEO of the non-profit advocacy group Better Markets, said the Federal Reserve must act urgently to fix the problems laid out in the central bank's post-mortem on Silicon Valley Bank. Specifically, he said, it's time to undo the widely criticized industry deregulation that contributed to SVB's demise.

Some proposals in the report "are not only inadequate but may also be unsuccessful given the financial industry’s ceaseless efforts to protect that deregulation," Kelleher said in a statement. "The known risks will continue to metastasize, and new risks will emerge."

The Fed and other banking regulators must act quickly to prevent another bank from collapsing by bolstering supervision and increasing capital and liquidity requirements, he argued.

“The report in effect says that if you take the cops off the city streets in a high crime neighborhood, then there’s going to be lots more lawbreaking... It is no mystery how to address these failures: put the regulatory cops back on the finance beat..."

Silicon Valley Bank and Signature Bank shared numerous similarities that led to their demises last month, according to a third banking report released Friday, this time by the Government Accountability Office.

The non-partisan agency cited poor risk management, weak liquidity buffers, unchecked rapid growth and an over-reliance on uninsured deposits as factors that caused both banks to fail.

The banks were slow to respond to notices they received from regulators, while regulators were equally slow to escalate supervisory actions, the GAO report found.

To contain the systemic risk that arose after SVB and Signature Bank collapsed, the Treasury Department created the Bank Term Funding Program to help shore up liquidity for banks who could take out a one-year loan from one of the Fed's regional banks. As of April 19, $74 billion was lent out through the program, the GAO reported.

In its report Friday, the FDIC acknowledged it fell short when it came to providing Signature Bank with adequate and timely reviews, citing staffing shortages at the agency.

The FDIC said it had issues with staffing between 2017 and 2023 that impacted its work.

Signature Bank was supposed to have its own examination team through the FDIC's New York office. But since 2020, 40% of the regional office's roles have been vacant or filled by temporary staff, according to the FDIC.

"Certain targeted reviews were not completed timely or at all because of resource shortages," the report said.

The high cost of living in New York, salary competition from private-sector financial firms and other regulatory agencies are among the reason the FDIC is struggling to hire new talent, the agency said.

The collapse of Signature Bank was due to "poor management," according to a report from the Federal Deposit Insurance Corporation released Friday. 

In particular, bank management did not fully understand the risks associated with accepting cryptocurrency deposits, the report said.

However, "contagion effects" from Silicon Valley Bank's failure and Silvergate Bank's self-liquidation, which occurred just days before Signature Bank was forced to close, helped ignite the run on deposits, the FDIC report stated.

The Fed report on SVB adds greater detail to many of the bank's shortcomings that became apparent soon after its collapse.

Most notable, perhaps, is the Fed's recognition of its own institutional flaws. In a letter accompanying the report, Vice Chair Barr offers a frank critique of his own agency.

"We need to develop a culture that empowers supervisors to act in the face of uncertainty," he wrote. 

He warned that the Fed must "guard against complacency" after more than a decade of banking stability that "may have led bankers to be overconfident and supervisors to be too accepting." 

It may seem surprising that First Republic, a midsize bank catering to wealthy clients in coastal states, became such a danger to the American banking system that the government had to cudgel the industry to stage an intervention.

The reason has a lot to do with the high-net-worth people who bank there.

Investors saw similarities between First Republic and the failed Silicon Valley Bank — another midsize Bay Area-based lender with a deep-pocketed client base.

“These depositors are particularly trigger-prone,” said Patricia McCoy, a law professor at Boston College. “They’re sophisticated, they know they have other options, and they have mechanisms in place to move money quickly.”

That “particularly volatile” base of depositors presents a risk for investors, said McCoy, who helped establish the Consumer Financial Protection Bureau.

Big banks like JPMorgan Chase have diversified their depositor bases to include more of what McCoy calls “sticky deposits.” In other words, regular folks who have less than the FDIC-insured limit of $250,000 in the bank.

Shares of First Republic stock dropped 50% on Friday as investors grew increasingly worried that the bank will collapse.

The embattled lender's stock rallied on Thursday after most banks had reported their earnings with no bad news, allowing investors to breathe a sigh of relief and pick at the beaten-down stock.

That trend continued Friday morning, after Reuters reported that US officials were holding discussions about the possibility of rescuing First Republic.

Then, CNBC reported that the bank would likely go into receivership. An administration source familiar told CNN that the White House has no new plans to rescue the bank.

Investor optimism evaporated, and the stock hemorrhaged once again. Shares of First Republic are down about 97% for the year.

Adding to fears is the fact that it's Friday — a day of the week that has historically seen banks fail, since federal regulators like to take the weekend to clean up a failed institution and have it reopened, preferably under new ownership, by Monday morning.

First Republic Bank would be the third bank to fail in the past two months after the collapses of Silicon Valley Bank and Signature Bank in March.

The latest measure of how Americans are feeling about the economy is in — and persistently high inflation continues to weigh on consumer sentiment.

The closely watched consumer sentiment index from the University of Michigan landed at 63.5 for April, ticking up only 1.5 points from the month before.

"The mild recovery in consumer sentiment we saw last fall and winter appears to have stalled. Consumers are bracing for the labor market to weaken," Joanne Hsu, director of the university's Surveys of Consumers, said in a statement with the report on Friday.

"Sustained, meaningful improvements in economic conditions — which will have to come from cooling inflation, given how little room there is for labor markets to strengthen — will be required for their sentiment to rise again," she added.

Still, inflation is easing even though it remains stubbornly high, according to a key federal report also released Friday. But consumer spending is softening as well.

The Commerce Department's March Personal Income and Outlays report — which contains the Federal Reserve's favorite inflation gauge as well as a comprehensive picture as to how much Americans are bringing in, spending and saving — showed that after a January surge, consumer spending growth trailed off considerably and was flat for March.

The largest increases in consumer expenditures during March were for housing expenses and health care, according to the report. And aside from higher spending at restaurants and other service businesses, consumers cut back in pretty much every other area. 

"This is a consumer that's retrenching," said Tim Quinlan, senior economist at Wells Fargo. "This is not a consumer with a devil-may-care attitude that just can't be stopped and can spend through anything."

Although spending has moderated, there aren't broader signs that a more alarming deterioration is occurring, said Bernard Yaros, an economist at Moody's Analytics.

Real disposable income grew again in March, as did the personal saving rate. Separately, a report published Friday by the Bureau of Labor Statistics showed a 1.2% uptick in workers' wages and benefits during the first quarter.