Ayyyeee… What’s Goodie Everyone. So I got some tea and it involves some new rules and regulations after the Silicon Valley Bank’s collapse.
Federal regulators in a report on Friday outlined a number of disastrous decisions including failures by the Federal Reserve and Federal Deposit Insurance Corporation that ultimately led to last month’s banking crisis. A much-anticipated 114-page report from the Fed on Silicon Valley Bank(SVB)set the stage for a new, aggressive push to tighten up many of the rules that were eased by Congress in a bipartisan vote in 2018 and further loosened by the Fed in 2019. A separate report on Signature Bank’s collapse released later Friday by the FDIC blamed that bank’s management for ignoring risks and also faulted the FDIC for not pushing the bank harder.
The Federal govenrnment launched its own investigation of what went wrong after the implosion of SVB and Signature Bank spurred two weeks of economic panic and forced an emergency government intervention in March. That crisis appears to have been contained, but officials have been seeking to explain what regulators missed and how two poorly managed banks could so quickly threaten the broader financial system. Meanwhile, the unknown fate and plunging share price of First Republic Bank has left regulators and industry executives scrambling to find a solution that does not also cause that bank’s collapse.
The FDIC will also release a report on whether the rules governing deposit insurance should be changed. (Typically, the FDIC ensures deposits up to $250,000, but in the recent crisis, government officials decided to guarantee all deposits at both banks to avoid a wider catastrophe.) The Fed and the FDIC regulate different kinds of banks, with the FDIC overseeing state chartered and regional banks that are not members of the Fed system, as SVB was.
Michael Barr who was nominated by President Joe Biden as the Fed’s chief banking cop in 2022, wrote the report on SVB and will lead any push for new rules. He has long been a critic of past moves to weaken banking system oversight, which he had helped to strengthen after the 2008 financial crisis.
“SVB’s failure demonstrates that there are weaknesses in regulation and supervision that must be addressed,” Fed Vice Chair for Supervision Michael Barr wrote in a letter accompanying his report. “Regulatory standards for SVB were too low, the supervision of SVB did not work with sufficient force and urgency, and contagion from the firm’s failure posed systemic consequences not contemplated by the Federal Reserve’s tailoring framework,” Barr wrote, referring to moves in 2018 and 2019 to ease the banking system’s rules.
Still, the report drew criticism from Republicans who dispute claims that the looser rules directly contributed to SVB’s downfall. In a statement, Sen. Tim Scott (S.C.), the ranking Republican on the Senate Banking Committee, said bank regulators “attempt to deflect blame” and were wrongfully pushing for “additional authorities and a rollback of the tailoring provisions that were passed in 2019.”
Rep. Patrick McHenry (R-N.C.), the chairman of the House Financial Services Committee, said that although he agreed with Barr on some issues including on a need to pay attention to liquidity when a bank is growing fast “the bulk of the report appears to be a justification of Democrats’ long-held priorities.” “The section on tailoring is a thinly veiled attempt to validate the Biden Administration and Congressional Democrats’ calls for more regulation,” McHenry said. “Politicizing bank failures does not serve our economy, financial system, or the American people well.”
In a statement, Greg Baer, president and chief executive of the Bank Policy Institute, said the report shouldn’t have blamed tailoring since the investigation “make plain the fundamental misjudgments” of the Fed’s own supervisors. Baer said there is nothing in existing law that requires examiners to drop the ball on interest rate risk, for example. He also took issue with the Fed announcing its policy recommendations without input from the public or Congress, or waiting for other independent investigations.
Barr’s proposals will go through standard rulemaking procedures, but senior Fed officials have expressed confidence that these changes will come to fruition. Barr said the Fed will reevaluate a range of rules for midsize banks that have at least $100 billion of assets. The Fed also will reconsider how it guards against risks from rising interest rates, which are seen as having played a major role in SVB’s demise. The central bank will reexamine 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.
The changes would not require separate legislation or approval by Congress, according to senior Fed officials. Powell and the Fed’s board of governors were briefed on the findings but were not involved in the review or final report, and neither were the staffers involved in supervising SVB before it failed in early March.
Barr’s investigation pointed to four main culprits, with blame spanning perceived recklessness by the bank’s leadership and Congress’s push to weaken oversight of the banking system. The report also characterized SVB’s meltdown as a perfect storm of compounding hazards: the bank’s explosive growth, a weak supervisory culture at the Fed and even the pandemic’s interference with routine regulatory examinations.
The report said, SVB’s board of directors and management had failed to manage their risks. Second, Fed supervisors did not appreciate the extent of those risks as SVB ballooned in size from $71 billion in 2019 to more than $211 billion in 2021 without facing stricter standards. Then, when Fed officials did notice problems with the bank, they did not take sufficient steps to ensure that SVB corrected its deficiencies. And finally, the Fed’s approach to “tailoring” bank rules undermined effective supervision “by reducing standards, increasing complexity, and promoting a less assertive supervisory approach.”
Fed also released more than two dozen documents specific to SVB, materials that are typically confidential and visible to supervisors only. The Fed said the bank had 31 unaddressed safety and soundness supervisory warningstriple the average number for peer banks. In one example, the Fed released a presentation given to the board on interest rate risk before the bank’s collapse. The slide deck gave only one example SVB noting that the bank had been downgraded and was being given heightened supervisory attention. The bank failed weeks later. At Signature Bank, the FDIC found that the institution was doomed by “poor management” as its leaders “pursued rapid, unrestrained growth.” The bank also funded that expansion by relying too heavily on uninsured deposits, without implementing any checks on its liquidity risk.
But the FDIC, too, failed to carry out its supervisory duties, according to the report. Officials could have escalated warnings against the bank sooner and more effectively. The investigation also said that regulation was hampered back by basic staffing challenges, including persistent vacancies, frequent turnover and difficulty filling key positions that let oversight slip through the cracks.
Credit: The Washington Post.