Banking on Disaster: Republic First's Failure Just the Beginning

Republic First Bank, a regional lender based out of Philadelphia, became the first bank failure of 2024 on Friday when it was shut down by Pennsylvania's bank regulator and the Federal Deposit Insurance Corp. (FDIC) seized control of the operation.

The FDIC quickly made a deal for Fulton Bank to buy Republic First's assets, but one expert on financial regulatory reform and bank failures says the collapse could be a harbinger of things to come.

"This bank failure indicates that additional failures will occur and will range between smaller community banks and larger banks," said Joseph Lynyak, a banking attorney at Dorsey & Whitney, regarding the seizure of Republic First by U.S. regulators.

"The cause is twofold: higher-cost deposits exceeding the yield on low-yield treasury securities and similar investments held by banks, and the deteriorating commercial real estate market and commercial real estate loans," said Lynyak, who specializes in bank receiverships and failures.

Regional banks have been struggling to retain deposits as customers seek the safety of larger "too-big-to-fail" rivals, and higher interest rates have diminished the value of their loan books due to increased unrealized losses and lower commercial real estate values.

Investors have worried about a possible contagion in the sector since three prominent lenders – Silicon Valley Bank, First Republic and Signature Bank – collapsed in early 2023.

Prior to the takeover of Republic First, the last U.S. bank to fail was Iowa-based Citizens Bank in November 2023.

Then in January, New York Community Bank (NYCB) fell under pressure over concerns about its exposure to the beleaguered commercial real estate sector, but NYCB was able to raise $1 billion last month from investors, including former Treasury Secretary Steven Mnuchin's Liberty Strategic Capital.

The collapse of Republic First has reignited fears of contagion.

"The FDIC has indicated that banks have potentially significant unrealized losses in their investment portfolios, and many banks will ultimately need additional capital to address these unrecognized losses," Lynyak said.

This article originally appeared on Fox Business