WASHINGTON — The Federal Reserve released a sweeping and highly critical report Friday that examines why its own oversight and regulation of Silicon Valley Bank failed to address the risks that ultimately led to its mid-March collapse, a crash that was the largest bank failure since the Financial crisis of 2008.
The review — conducted by Michael S. Barr, the Fed’s vice chairman of oversight — blamed Fed regulators for not “taking firm enough action.” Mr Barr also stated that the bank’s bankruptcy “demonstrated regulatory and supervisory weaknesses that need to be addressed”.
He added that “regulatory standards for SVB were too low, SVB’s oversight did not operate with sufficient vigor and urgency, and contagion from the company’s failure posed systemic consequences not considered by the Federal Reserve’s bespoke framework.”
The review spanned hundreds of pages and painted a picture of a bank growing rapidly in size and risk with limited intervention from regulators who overlooked obvious problems and were slow to address those they did recognize. And it outlined a range of changes in banking supervision and regulation — from stronger deterrents against risk-taking to possible curbs on stimulus pay for executives at poorly managed banks — that the Fed will consider in response to the disaster.
The post-mortem is a rare example of overt self-criticism from the Fed, and it comes as the aftershocks of the Silicon Valley Bank collapse continue to shake the US financial system. First Republic Bank, a regional lender that needed a cash infusion from other major banks as jittery customers collected their deposits and fled, remains in jeopardy.
Mr. Barr’s review was announced March 13, just after the bankruptcy of Silicon Valley Bank and the government’s sweeping announcement on March 12 that it would protect the bank’s big depositors, among other measures to strengthen the banking system. That same weekend, the federal government also closed a second institution, Signature Bank. The Federal Deposit Insurance Corporation, which was the primary regulator for Signature, will release its own report later Friday.
Still, attention has focused heavily on Silicon Valley Bank, both because it failed before and because significant weaknesses at the bank seem to have started and gotten worse in the years leading up to its demise.
The bank had a large portion of deposits above the government’s $250,000 insurance limit. Uninsured depositors are more likely to pull their money at the first sign of trouble to avoid losing their savings, making that a major vulnerability for Silicon Valley Bank. The bank’s leaders also made a strong bet that interest rates would remain low, which turned out to be a bad one as the Fed quickly raised rates in an attempt to contain inflation. That caused the bank to take big losses and helped bring it to its knees – leading to a swift bankruptcy that terrified depositors at other banks across the country.
“Contagion from the SVB bankruptcy threatened the ability of a wider range of banks to provide financial services and access to credit to individuals, families and businesses,” said Mr Barr.
Mr. Barr was a key architect of tightened banking regulation in the aftermath of the 2008 crisis. He was nominated for office by President Biden and took office in July 2022 — near the end of Silicon Valley Bank’s life. Considering that much of his review was about oversight under his predecessor, Randal K. Quarles, the Trump-appointed vice president of oversight in that office from 2017 to October 2021.
The report itself was prepared by regulatory and financial experts within the Fed system who were not involved in the bank’s oversight. They had full access to regulatory documents and internal communications, and had the opportunity to interview relevant Fed officials, the release said.
The findings suggested that regulators didn’t fully understand how much risk Silicon Valley Bank was taking. Fed supervisors signaled problems at the bank, but they did not catch all of them or did not follow them intensively enough. The bank’s management was rated satisfactory from 2017 through 2021, despite repeated observations of risk-taking, the report said.
Silicon Valley Bank had 31 open supervisory findings when it failed in March 2023, about three times as many as its peers, according to the Fed’s report.
The review said it was difficult to pinpoint exactly what caused the dragging, but pointed to a culture focused on consensus and oversight changes that took place under Mr. Quales and during the Trump administration. Mr Quarles suggested in speeches that banking supervision should be more transparent and predictable.
“Staff felt a shift in culture and expectations from internal discussions and observed behaviors that changed the way supervision was conducted,” the report said.
Even as Silicon Valley Bank expanded and amassed greater risk, resources spent on oversight actually declined, the report said: Scheduled hours spent overseeing the company dropped more than 40 percent from 2017 to 2020.
That was because banking supervision resources across the Fed system were also limited. From 2016 to 2022, the Fed system’s oversight workforce fell, even as banking sector assets increased, the report said.
Mr. Barr raised a number of immediate considerations to focus on — and changes to make — in the wake of Silicon Valley Bank’s collapse.
“The combination of social media, a highly networked and concentrated depository base and technology may have fundamentally changed the speed of bank runs,” Mr Barr wrote, noting that social media enabled rapid bank runs.
The regulatory and supervisory adjustments that Mr. Barr proposed include a renewed look at how the Fed supervises banks of various sizes, including a revision of the “custom” rules enacted during the Trump administration, which made supervision less burdensome for many small and medium-sized banks. .
Mr Barr’s report said the Fed would re-evaluate a set of rules for banks with $100 billion or more in assets – for which the rules were relaxed. Those banks faced looser supervision because they were not considered “systemic,” but the collapse of Silicon Valley Bank has underlined that even smaller banks can have big impacts.
The episode showed that a bank’s distress can have system-wide consequences through contagion – with concerns about one company spreading to others – “even if the company is not extremely large, strongly tied to other financial counterparties or involved is in critical financial services,” said Mr. said Barr in his review.
Banks with poor capital planning, risk management and poor governance could also face “additional capital or liquidity beyond regulatory requirements,” the report said, suggesting that “restrictions on capital distributions or incentive payments may be appropriate and effective in some cases.” can be”.
And Mr Barr’s overview suggested that a broader group of banks should consider gains or losses on their securities holdings when it comes to their capital – money that can help a bank get through a time of crisis. That would be a major departure from the way the rules are currently set, and Mr Barr underlined that changing such standards would require a regulatory process that takes time.
“I agree and support” the “recommendations to address our rules and oversight practices, and I am confident they will lead to a stronger and more resilient banking system,” said Jerome H. Powell, the Fed Chairman, in a press release accompanying Mr. Barr’s report.
The report ceased with open finger-pointing. No specific individuals were named or implicated who failed to properly account for the risks in the Silicon Valley Bank case, but focused on weaknesses in the overall system of regulation and supervision.
And some outside the Fed have suggested that the bank’s oversight failures should be judged by an independent body, as Mr Barr must continue to work with his central bank colleagues and may be hesitant to criticize them.
“We need someone with some independence to dig into,” Jeff Hauser, director of the Revolving Door Project, said ahead of the release.
Mr Barr suggested he would be open to such a follow-up.
“We welcome external assessments of the failure of the SVB, as well as congressional oversight, and we intend to take this into account as we make changes to our banking oversight and regulation framework,” Mr Barr said in his statement.
