First Republic’s white-glove service had no answer for an uninsured balance

The week

On May 1, 2023, the California regulator closed First Republic Bank and appointed the FDIC as receiver. A receiver is the party that takes control of a failed bank to protect depositors and sell or wind down what is left. The FDIC sold substantially all of First Republic’s deposits and most of its assets to JPMorgan Chase. By assets it was the second-largest US bank failure, after Washington Mutual in 2008.

For years, First Republic had been the bank wealthy families and successful businesses talked about with affection. Clients had had a personal banker who knew their name, decisions came quickly, and mortgages came on attractive terms. Then, in the spring of 2023, a single question cut through all of that warmth: if this bank fails, is my money safe?

The answer for many clients depended on deposit insurance. The Federal Deposit Insurance Corporation, or FDIC, is the federal agency that guarantees bank deposits up to a set limit and steps in to wind up banks that fail. Money above that limit is “uninsured,” and in a crisis uninsured depositors have every reason to move first.

First Republic had been under pressure since Silicon Valley Bank failed in March. On March 16 eleven large banks placed $30 billion of deposits with it to restore confidence, an unusual show of support from competitors. It was not enough: when First Republic reported first-quarter results on April 24, it disclosed that deposits excluding those placed by the large banks had fallen by more than $100 billion during the quarter, and its shares fell sharply.

On the day of the sale, the FDIC published a report setting out options for reforming deposit insurance, a sign that the agency saw the limits of the existing system as part of the story.

First Republic’s celebrated service turned out to be no help with the one question clients were asking. A warm phone call cannot tell a client how much of their money is protected, move it somewhere safer within the hour, or answer with specifics. Those are capabilities built in advance, in data, products and preparation.

First Republic built its franchise on service. Affluent households and businesses got personal bankers, quick decisions and attractive mortgage terms that won the wider relationship. That model produced loyal clients and years of growth. It also produced a deposit base with a large share above the insurance limit. When clients asked whether that money was safe, a banker’s call could not answer the question.

What mattered in March and April 2023 was less attentiveness than three capabilities that sit in data, products and preparation: seeing each client’s insured position, changing it quickly, and telling clients something specific. Few banks or credit unions had all three.

Deposit insurance, and runs measured in hours

A bank takes in deposits and lends most of that money out, or invests it in assets such as bonds. That works because, on any normal day, only a small share of depositors want their money back. A bank run happens when many depositors try to withdraw at once, because they fear the bank may not be able to pay. Even a healthy bank cannot hand everyone their cash on the same afternoon.

Deposit insurance exists to stop runs before they start. If ordinary depositors know their money is guaranteed, they have no reason to rush. But the guarantee has a limit. Clients with balances above it, typically businesses and wealthier households, are exposed to loss, and they are the ones with both the incentive and the resources to move quickly.

Technology changed the pace. Moving a large balance used to involve a branch visit or a call to a banker. Today it can be a few taps on a phone, and news, rumor and worry travel through social media just as fast. A confidence crisis that might once have unfolded over weeks can now play out in days or hours. That compresses the time a bank has to answer its clients’ questions to almost nothing, which is why the capabilities below have to exist before they are needed.

One more term is useful. A bank’s core banking system is the central software that keeps track of every account, balance and transaction: the bank’s master ledger. It is very good at knowing what is in each account. As the next section explains, it is usually much worse at knowing who really owns those accounts and how they are insured.

Seeing each client’s insured position

Deposit insurance covers each depositor, at each insured bank, in each ownership category. A single household may hold individual, joint, retirement, trust and business accounts, each insured under different rules. Core banking systems hold accounts. Most do not calculate coverage by owner and category.

It is as if a household insurance policy covered each family member’s belongings separately, with different rules for jewelry, art and business equipment, while the insurer’s records listed items rather than people or categories. Working out what is covered for any one family requires stitching the list together by hand.

The largest banks, those with two million or more deposit accounts, must keep records that let the FDIC calculate coverage quickly under its Part 370 rule. Smaller institutions generally have no such requirement and no such view.

The result in 2023 was that relationship managers often could not tell a worried client, with confidence, how much of the relationship was insured. Building that view is a data project. It needs reliable owner and joint-owner records, beneficiary data for trust accounts, and entity hierarchies for business clients, meaning a clear map of which companies, subsidiaries and partnerships belong to the same client group. The output is an estimated insured and uninsured amount per relationship, with a clear statement that the FDIC makes the final determination.

Accuracy matters as much as availability. A banker who overstates a client’s coverage creates a misrepresentation risk under FDIC rules on how deposit insurance may be described. The coverage view should show its assumptions, such as which trust beneficiaries were counted, and route complex trust and business structures to a trained specialist rather than leaving the answer to whoever picks up the phone.

The same data serves treasury. Uninsured balances held by the largest relationships are the deposits most likely to move together. A bank that can rank them can tell its asset-liability committee, the senior group that manages the balance between what a bank owes and what it owns, where outflow risk sits and which clients to call first.

A Friday call from a private banking client

Suppose a regional bank has a strong private banking arm. A family client calls on a Friday morning. She holds a personal account, a joint account with her husband, two trust accounts for her children and an operating account for the family business. The banker’s screen shows five balances and a total. It does not show which balances fall into which insurance category, or how the trusts are counted. The banker, trying to reassure her, gives an estimate that turns out to be too generous. The client moves most of the money anyway, and the bank has now also made a statement about coverage it cannot stand behind. With a coverage view in place, the same banker could have shown her a clear split between estimated insured and uninsured amounts, flagged the trusts for a specialist, and offered a concrete next step before the call ended.

Changing it quickly

Once a client knows the position, the next question is what can be done today. Several legitimate tools extend coverage:

• Restructuring across ownership categories. Accounts can be reorganized so that more of the balance falls within separate insured categories.
• Reciprocal deposit networks. These place portions of a large balance at other banks, so each portion is insured, while the originating bank keeps an equivalent amount of funding. The client keeps one banking relationship; behind the scenes, the money is spread across many banks.
• Insured cash sweeps do something similar for operating accounts, automatically moving balances above a set level into insured placements.
• Sweeps into money market funds or Treasury bills move cash out of deposits altogether, into investments rather than bank balances.

Credit unions have analogous options under NCUA share insurance, the credit union counterpart to FDIC coverage.

Speed was the constraint. In spring 2023 clients wanted changes within hours. Institutions that required paper forms, wet signatures or a banker appointment to enroll in a reciprocal program created queues, and queues during a run look like the bank stalling. Institutions with network agreements already signed, electronic enrollment and pre-approved documentation could move a large balance into coverage on the same day.

These tools carry costs. Network fees and lower margins reduce the value of the deposit. Reciprocal funding above a statutory cap counts as brokered, which matters for weaker banks, because brokered funding draws closer regulatory scrutiny when a bank is under strain. Some clients will take the cash out anyway. The comparison that matters is with losing the deposit entirely. A balance kept in a reciprocal arrangement is still a relationship. A balance wired elsewhere on a Friday afternoon is not.

Telling clients something specific

Most banks communicated in March and April. The difference was specificity. Clients asked about deposit concentration, unrealized losses on securities, available borrowing capacity and coverage. First Republic itself announced additional liquidity, including Federal Reserve funding, on March 12, and outflows continued.

A liquidity figure answers a question about the bank. It does not answer a depositor’s question about their own money. Communication worked best when it came with an action the client could take on the spot, such as enrolling a balance in coverage.

Speed requires preparation, because the first days of a confidence shock are the wrong time to draft. Useful preparation includes:

• Message sets for each client segment approved in advance by legal and investor relations, so what bankers say matches what a listed bank discloses to investors.
• Rules on what front-line staff may say about the institution’s condition.
• Contact center scripts with a surge staffing plan.
• A ranked list of the largest and most connected depositors, each with a named owner and a call plan. “Connected” matters: a venture firm or professional association that advises many clients can move a great deal of money with one email.

Who owns what inside the bank

One reason so few institutions had all three capabilities is that each sits with a different part of the organization, and none of them naturally owns the client’s question. Naming them explicitly is the first step.

Data and technology own the coverage view. They have to pull ownership, beneficiary and entity information out of the core system and related records, fix gaps, and present a clear estimate to bankers. This is often the slowest piece, because the underlying records were collected for opening accounts, not for calculating insurance.

Treasury, the team that manages the bank’s funding and liquidity, owns the ranked list of uninsured balances and the view of outflow risk. It also has the strongest interest in keeping deposits inside the relationship through reciprocal placements rather than losing them outright.

Product and operations own the coverage tools: the network agreements, the sweep programs, the enrollment process and the documentation. Their measure of success is how quickly a client can go from “I am worried” to “my balance is covered.”

Legal, compliance and investor relations own what may be said. They approve the segment messages in advance and set the rules for what front-line staff may say about the bank’s condition, so that private reassurance never contradicts public disclosure.

The relationship managers and contact center are where all of this meets the client. They need the coverage view on their screens, the coverage tools a click away, the approved words in hand and a specialist to call for complex cases.

When these pieces are built separately, each can look finished while the whole does not work. A coverage view that bankers cannot reach from the screen they use, or an enrollment process that operations has streamlined but legal has not approved for use in a crisis, fails at the moment it is needed. A single executive owner for “depositor confidence readiness,” with the tabletop exercise as the test, is a simple way to make sure the parts connect.

Payroll above the limit

Business clients raise the stakes. A mid-sized company may hold its payroll in an operating account well above the insurance limit, simply because that is where payroll has to sit before it is paid out. If the company’s finance director becomes worried, the instinct is to move the whole balance to a larger bank before the next pay run. A bank that can offer an insured cash sweep on that account, enrolled electronically the same day, gives the finance director a way to protect payroll without leaving. A bank that can only offer a meeting next week gives the finance director a reason to wire the money out that afternoon.

Testing it before you need it

All of this can be tested. A tabletop exercise, a structured rehearsal in which leaders walk through a realistic scenario around a table, can simulate a regional confidence shock. It can measure how long the institution takes to reach its top hundred depositors, give each an accurate coverage figure, and complete the first enrollments.

Those three times are the client experience metrics that matter in a crisis. They belong in the resilience plan beside the liquidity stress test, and they should be retested whenever the core system or the coverage products change. A bank that discovers in the exercise that it takes two days to reach its top hundred clients has learned something valuable at almost no cost. A bank that discovers it during a run has learned it too late.

Funding, loyalty and the cost of being ready

Funding and survival. Uninsured deposits that move together can drain a bank faster than any loan losses. Knowing where they sit, and being able to protect them, is a direct defense of the balance sheet.

Client relationships. Offering coverage solutions keeps clients inside the relationship even when they are anxious. A client who has been helped through a scare is often more loyal afterward.

Regulatory and legal risk. Misstatements about deposit insurance carry their own risk under FDIC rules. Clear tools and trained specialists reduce it.

Cost, honestly weighed. Reciprocal fees, sweep programs, data work and exercises all cost money. Set against the loss of a large share of deposits in a matter of days, they are modest.

Signed agreements and a timed rehearsal

A well-prepared bank looks like this: relationship managers can see an estimated insured and uninsured split for every relationship, with assumptions shown; treasury and the call plan work from the same ranked list; network agreements are signed and enrollment is electronic; segment messages are pre-approved; and the bank has timed itself in a tabletop.

The failures are familiar:

• Assuming great service is a substitute for preparation. Warmth reassures in normal times. In a crisis, clients want facts and options.
• Leaving coverage questions to whoever answers the phone. Complex trusts and business structures need specialists.
• Keeping coverage tools behind paperwork. If enrollment needs a wet signature and an appointment, it will not happen in time.
• Answering client questions with bank-level statistics. Liquidity totals do not tell a depositor about their own money.
• Never rehearsing. Without a timed exercise, nobody knows how long it takes to reach the clients who matter most.

Readiness can be timed before a run

1. If our largest client called today, could their banker tell them, accurately, how much of their relationship is insured?
2. What share of our deposits is uninsured, and which hundred relationships hold the most of it?
3. Are our reciprocal and sweep agreements signed, and can a client enroll electronically the same day?
4. Do we have pre-approved messages for each client segment, and do they match our investor disclosures?
5. In our last tabletop, how long did it take to reach our top hundred depositors, give each a coverage figure and complete the first enrollments?

With hindsight

Spring 2023 proved to be the peak of the regional bank stress, though commercial real estate exposures kept pressure on some lenders afterward.

The FDIC’s options report favored targeted increases in coverage for business payment accounts, the accounts companies use for payroll and paying suppliers. Congress did not raise the general limit. That means the basic problem First Republic faced, large balances above the insurance limit, remains in place for banks everywhere.

The FDIC’s own review of its supervision of First Republic, published in September 2023, listed overreliance on uninsured deposits and depositor loyalty among the attributes that made the bank vulnerable. That is a striking finding for anyone who thinks of loyalty as a defense. Loyalty is real, but it is not a funding strategy. When clients fear for their money, loyalty gives way to self-protection.

In July 2023 the banking agencies updated their liquidity guidance to stress readiness to borrow at the Federal Reserve’s discount window, the central bank’s standing facility for lending to banks against collateral. The point was operational: a bank should be set up to borrow quickly, not discover in a crisis that the paperwork and collateral are not ready.

A simplified FDIC rule for trust account coverage took effect in April 2024, which made coverage easier to explain for many households. That eased one of the hardest parts of building a coverage view, though business structures and other categories remain complex.

Showing clients their position and changing it quickly remain the parts of a confidence shock a bank can prepare for in advance. A bank cannot control rumor, market sentiment or another institution’s failure. It can control whether its bankers know the answer to the question clients will ask first, and whether a solution is a click away rather than a week away. Those are choices made in calm times, and boards can ask whether they have been made.