The Federal Reserve has admitted to failing in its role as a banking industry watchdog in the run up to the collapse of Silicon Valley Bank (SVB) last month.[0] The bank’s failure set off a financial panic that led to the collapse of another major lender, Signature Bank, just two days later.[1] The Federal Reserve’s review of the supervision and regulation of SVB, led by Vice Chair for Supervision Michael S. Barr, found that regulatory standards for SVB were too low and that supervision did not work with sufficient force and urgency.[2] The review also found that contagion from the firm’s failure posed systemic consequences not contemplated by the Federal Reserve’s tailoring framework.[3]
Michael Barr has proposed a series of potential changes to how the Federal Reserve oversees financial institutions, including capital and liquidity requirements and annual stress testing.[2] These changes would not require legislative approval but would likely take several years to complete.[4] The Fed will re-evaluate a range of rules for midsize banks that have at least $100bn of assets, reconsider how it guards against risks from rising interest rates that are seen as having played a major role in SVB’s demise, and re-examine rules governing how much capital banks have to keep on hand; the stability of banks’ uninsured deposits; and the Fed’s audits, known as “stress testing,” which the 2019 rules change made less complex.[5]
Jerome Powell, the Chairman of the Federal Reserve, said he was confident the recommendations would lead to a more resilient banking system.[6] However, Rep. Patrick T. McHenry (R-N.C.), the Chairman of the House Financial Services Committee, has accused the report of being “a thinly veiled attempt to validate the Biden Administration and Congressional Democrats’ calls for more regulation.”[7]
The collapse of SVB has also led to an investigation by Congress into the role of the Federal Reserve’s San Francisco regional bank and other state and federal banking regulators.[8] The report found that supervisors delayed action to gather more evidence, although SVB’s weaknesses were clear and growing. As a result, SVB’s issues continued to deteriorate without any pressure from supervisors to address them. Regulatory staffers also told Barr that after tailoring rules were adopted in 2019, they felt pressure to “reduce burden on firms, meet a higher burden of proof for a supervisory conclusion, and demonstrate due process when considering supervisory actions.”
Barr called for a culture change at the Fed that empowers supervisors to act in the face of uncertainty.[7] “In the case of SVB, supervisors delayed action to gather more evidence even as weaknesses were clear and growing. This meant that supervisors did not force SVB to fix its problems, even as those problems worsened,” he said.
0. “Federal Reserve says it ‘failed’ in run up to Silicon Valley Bank collapse” Yahoo! Voices, 28 Apr. 2023, https://www.yahoo.com/gma/federal-says-failed-run-silicon-151338542.html
1. “Federal Reserve says it ‘failed’ in run up to Silicon Valley Bank collapse” ABC News, 28 Apr. 2023, https://abcnews.go.com/Business/federal-reserve-failed-run-silicon-valley-bank-collapse/story?id=98936669
2. “Federal Reserve will consider tougher rules for banks after Silicon Valley Bank failure” Axios, 28 Apr. 2023, https://www.axios.com/2023/04/28/fed-report-bank-failure-svb-stock-signature
3. “Fed autopsy on SVB details grave mismanagement” The Mercury News, 28 Apr. 2023, https://www.mercurynews.com/2023/04/28/fed-autopsy-on-svb-details-grave-mismanagement/
4. “Here’s the Fed’s Plan for Tighter Bank Oversight After SVB’s Failure” Bloomberg, 28 Apr. 2023, https://www.bloomberg.com/news/articles/2023-04-28/here-s-the-fed-s-plan-for-tighter-bank-oversight-after-svb
5. “Fed says it must strengthen banking rules after SVB’s collapse” The Washington Post, 28 Apr. 2023, https://www.washingtonpost.com/business/2023/04/28/silicon-valley-bank-collapse-investigation
6. “Federal Reserve Board announces the results from the review of the supervision and regulation of Silicon Valley Bank …” Federal Reserve, 28 Apr. 2023, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20230428a.htm
7. “Fed blames Trump-era policies, SVB leaders — and itself — for bank’s stunning collapse” POLITICO, 28 Apr. 2023, https://www.politico.com/news/2023/04/28/fed-trump-svb-collapse-barr-00094413
8. “House Investigating SF Fed’s Role in SVB Collapse as Regulators Prepare Reports” Barron’s, 27 Apr. 2023, https://www.barrons.com/articles/house-investigating-sf-feds-role-svb-collapse-e40862fa