Banking System Vulnerability: Experts Warn of Imminent Failures After Republic First Collapse

The recent collapse of Republic First Bank, a regional lender based out of Philadelphia, has raised concerns about the stability of the banking system as experts suggest that further bank failures could be imminent. On Friday, Pennsylvania’s bank regulator and the Federal Deposit Insurance Corporation (FDIC) seized control of the operation after it became the first bank failure in 2024. However, Joseph Lynyak, a specialist on bank receiverships and failures at Dorsey & Whitney, warned that “additional failures will occur” affecting both smaller community banks and larger institutions. The cause behind Republic First’s collapse is twofold: higher-cost deposits exceeding the yield on low-yield treasury securities held by banks, coupled with deteriorating commercial real estate markets and loans. Regional banks have been struggling to retain depositors as customers seek safety in “too-big-to-fail” rivals amidst rising interest rates that diminish loan book values due to increased unrealized losses and lower CRE (commercial real estate) values. This issue has gained prominence since the collapse of three prominent lenders, Silicon Valley Bank, First Republic, and Signature Bank in early 2023. The last bank failure before that was Iowa-based Citizens Bank in November 2023. New York Community Bancorp (NYCB), which fell under pressure over concerns about its exposure to the commercial real estate sector earlier this year but successfully raised $1bn from investors including Steven Mnuchin’s Liberty Strategic Capital, remains vulnerable as a result of these trends in investment portfolio unrealized losses and capital requirements. The FDIC has warned that many banks may require additional funding due to such hidden risks which are yet to be recognized. This rekindled the contagion fears first witnessed during Silicon Valley Bank’s collapse last year, with experts suggesting a possible chain reaction as depositors withdraw funds from smaller lenders in search of safety elsewhere.