What Lessons Can Be Learned From the Republic First Bank Failure?

I just about missed it, the news of a regional bank failure and subsequent takeover by another bank at the tail end of April. Yes, it really happened! (You can read a short timeline and summary of key details in this article from Forbes.) Republic First Bancorp, with assets of approximately $6 billion, is very small in comparison to the overall U.S. financial industry and especially when compared to the 2023 failures of much larger Silicon Valley Bank, Signature Bank and, confusingly, First Republic Bank. Those earlier failures contributed to customer fear and large deposit withdrawals, which led to a classic bank run.

Republic First had problems for a number of years, even before the other bank failures in 2023, due to some bad senior leadership decisions. Investors had been trying to force the sale of the bank since 2021 due to low profitability and growth following these questionable decisions. The CEO was forced out in 2022, but attempts to improve the bottom line failed. As a result of a run on deposits and negative outlook, the regulator forced the closure of Republic First, and the subsequent sale to Fulton Bank took place.

I don’t believe this failure is a harbinger of things to come in the financial services industry, but there are definite lessons that can be learned by credit unions and banks. So, what can be done?

1. When your auditor or supervisory committee indicates there are issues, don’t ignore them. It’s important that directors dig deeper to better understand what’s going on and what the concerns are.
2. The board of directors as part of their fiduciary duties and strong governance framework needs to provide oversight of senior leadership, understand the strategies being employed and hold leadership accountable.
3. Enhanced liquidity management in light of the run on deposits could have helped the situation. This includes maintaining a higher ratio of highly liquid assets and having contingency funding plans that can be activated in case of unexpected large-scale withdrawals.
4. Implementing comprehensive risk management frameworks that can detect and mitigate risks arising from both external and internal factors is crucial for credit unions. This includes stress testing scenarios like sudden financial downturns or bank runs.
5. Transparent and timely communication with consumers and stakeholders can help mitigate panic and restore confidence. Effective communication can prevent the spread of unfounded rumors and alleviate customer/member concerns during uncertain times.
6. Ensuring that financial institutions maintain a healthy capital buffer to absorb potential losses can help prevent failures. Regulatory frameworks like Basel III aim to ensure that FIs hold enough capital to withstand financial stress.

The failure of Republic First Bank underscores the complex interplay of customer behavior, market conditions and internal management in the stability of financial institutions. Addressing these issues holistically is key to preventing similar failures in the future.

Taras Nohas, CMC, MBA, ICD.D, CCD, is principal and senior consultant at TN Governance and Strategy. He can help put together a purposeful and strategic approach to an organization’s board governance ensuring directors perform at their best and bring more to the table. For more information, contact CUES at p&S@cues.org.