WASHINGTON — The Federal Reserve on Friday launched a comprehensive and highly critical probe into why its own oversight and regulation of Silicon Valley banks failed to address the risks that ultimately led to their mid-March bankruptcy. published a comprehensive report. 2008 financial crisis.
A review conducted by Michael S. Barr, Fed Vice Chairman for Oversight, accused the Fed’s supervisors of “not acting forcefully enough.” Barr also said bank failures demonstrated “regulatory and supervisory weaknesses that must be addressed.”
He argued that “the SVB’s regulatory standards were too low. SVB’s oversight did not operate with sufficient force and urgency, and contagion from corporate failures was a system that was not envisaged in the Federal Reserve’s tailoring framework.” It has yielded positive results,” he added.
The review is hundreds of pages long and depicts a bank rapidly growing in size and risk, with limited intervention from supervisors who overlooked obvious problems and moved slowly to address perceived problems. It also outlines various changes to banking supervision and regulation, from increasing deterrents to risk-taking to curbing incentive compensation for poorly managed bank executives.
The postmortem is a rare example of blatant self-criticism by the Federal Reserve, and it comes as the aftermath of the Silicon Valley bank collapse continues to rock America’s financial system. First Republic Bank, a local lender that required cash infusions from other big banks, is still in jeopardy because it fled due to the
Mr. Barr’s review announced On March 13, there was the failure of the Silicon Valley Bank and the drastic announcement by the government on March 12 to protect the bank’s large depositors, among other measures to strengthen the banking system. Immediately after March 13th. That same weekend, the federal government also closed her second institution, Signature Bank. The Federal Deposit Insurance Corporation, which was the primary supervisor of the signing, will release its own report on Friday.
But Silicon Valley Banks are in the spotlight because of their previous failures and the fact that the bank’s significant weaknesses began and seemed to visibly worsen in the years leading up to its demise.
Banks had a large share of deposits exceeding the government’s $250,000 insurance limit. Depositors without insurance could withdraw money at the first sign of trouble to prevent losing deposits This is a major vulnerability for Silicon Valley banks. Banking leaders also made big bets on keeping interest rates low, which proved to be a bad outcome as the Fed rapidly raised interest rates to keep inflation in check. As a result, the bank suffered huge losses and was forced into bankruptcy. It led to a rapid bankruptcy, stunning depositors at other banks across the country.
“The repercussions of SVB’s failure threatened the ability of a wide range of banks to provide individuals, families and businesses with access to financial services and credit,” Barr said.
Barr was a key architect of the tightened banking regulations after the 2008 financial crisis. He was nominated by President Biden and took office in July 2022 — toward the end of Silicon Valley Banking. Given that, much of his review is under his predecessor, Randall K. Quarles, the Trump-appointed Vice Chairman to oversee in that office from 2017 to October 2021. This is reflected in the director of
The report itself was prepared by regulatory and financial experts within the Fed system who are not involved in banking supervision. They had full access to supervisory documents and internal communications, and were able to interview relevant Fed staff, according to the release.
The findings suggest that supervisors do not fully understand how much risk Silicon Valley banks are taking. Fed regulators flagged problems with banks, but didn’t catch everything or follow up on them intensively enough. The bank’s management was rated satisfactory from 2017 to 2021 despite repeated observations of risk-taking, the report said.
Silicon Valley Bank had 31 outstanding supervisory investigations when it failed in March 2023, about three times more than its peers, according to a Federal Reserve report.
The review said it was difficult to pinpoint exactly what caused the limp, but pointed to the consensus-focused culture and the supervisory changes that have taken place under the Trump administration and Quarles.
“Staff sensed changes in culture and expectations from internal discussions and observed behaviors that changed the way supervision was carried out,” the report said.
Even as Silicon Valley Bank expanded and accumulated greater risk, the resources devoted to its oversight have actually decreased, the report says. also limited. From 2016 to 2022, the number of supervisory staff in the Fed’s system declined, despite an increase in banking sector assets, the report said.
Barr laid out a number of immediate considerations for changes to focus on and make in the wake of the Silicon Valley bank failure.
“The combination of technology and social media, a highly networked and concentrated depositor base, may have fundamentally changed the speed of bank crackdowns,” Barr wrote, noting that social media has helped banks He pointed out that the crackdown was made possible quickly.
Barr’s proposed fine-tuning of regulation and supervision included revisiting how the Fed supervises banks of various sizes.
The Federal Reserve plans to reassess a set of rules for banks with more than $100 billion in assets, according to Barr’s report, and has relaxed the rules. It faced less scrutiny because it wasn’t considered, but it underscores that the failure of Silicon Valley Bank can have a big impact on even smaller banks.
This episode showed how a bank’s predicament can affect the entire system through contagion. When concerns about a company spread to other companies, even if the company is not very large, has strong ties to other financial partners, or is involved in significant financial services. said Mr. Mr. Barr said in his review:
Banks with inadequate capital planning, risk management and governance may also face “additional capital or liquidity beyond regulatory requirements” and “in some cases, capital allocation or It suggests that
Barr’s outline also suggests that the broader banks should take into account the gains and losses on their securities holdings when it comes to capital, the funds that help banks weather a crisis. This would be a significant departure from how rules are currently set, and Barr stressed that changing such standards would require a lengthy rulemaking process.
Federal Reserve Chairman Jerome H. Powell said he “agreees with and supports the recommendations to address our rules and supervisory practices” and believes they will help create a stronger and more resilient banking system. I am confident that it will lead to . bar report.
The report fell short of outright denunciations. In the case of Silicon Valley Bank, we did not name or involve specific individuals who failed to adequately account for the risks, and instead focused on weaknesses in the overall system of regulation and supervision.
Barr must continue to work with his central bank colleagues and may be hesitant to criticize them, so some outside the Federal Reserve believe that bank oversight failures will be reviewed by an independent body. It suggests that it is necessary to
Jeff Hauser, director of the Revolving Door Project, said ahead of the release:
Barr suggested that he would be open to such follow-ups.
“We welcome the external review of the SVB’s failures and congressional oversight, and we intend to take these into account as we make changes to our banking supervision and regulatory framework,” Barr said in a statement.
