The Federal Reserve blamed last month’s collapse of Silicon Valley Bank on poor management, watered-down regulations and lax oversight by its own staffers, and it said the industry needs stricter policing on multiple fronts to prevent future bank failures.
The Fed was highly critical of its own role in the bank’s failure in a report released Friday. The report, compiled by Michael Barr, the Fed’s top regulator, said bank supervisors were slow to recognize blossoming problems at Silicon Valley Bank as it quickly grew in size in the years leading up to its collapse. The report also pointed out underlying cultural issues at the Fed, where supervisors were unwilling to be hard on bank management when they saw growing problems.
Those cultural issues stemmed from legislation passed in 2018 that sought to lighten regulation for banks with less than $250 billion in assets, the report concluded. The Fed also weakened its own rules the following year, which exempted banks below that threshold from stress tests and other regulations. Both Silicon Valley Bank and New York-based Signature Bank, which also failed last month, had assets below that level.
The changes increased the burden on regulators to justify the need for supervisory action, the report said. “In some cases, the changes also led to slower action by supervisory staff and a reluctance to escalate issues.”
Separate reports also released Friday by the Federal Deposit Insurance Corp. and the Government Accountability Office, the investigative arm of Congress, also faulted the Fed and other regulators for a lack of urgency regarding Silicon Valley’s deficiencies. About 95% of the bank’s deposits exceeded the FDIC’s insurance cap and the deposits were concentrated in the technology industry, making the bank vulnerable to a panic.
The Fed also said it planned to reexamine how it regulates larger regional banks such as Silicon Valley Bank, which had more than $200 billion in assets when it failed, although less than the $250 billion threshold for greater regulation.
“While higher supervisory and regulatory requirements may not have prevented the firm’s failure, they would likely have bolstered the resilience of Silicon Valley Bank,” the report said.
Tighter regulation seen
Banking policy analysts said the trio of critical reports made it more likely regulation would be tightened, though the Fed acknowledged it could take years for proposals to be implemented.
The reports “provide a clear path for a tougher and more costly regulatory regime for banks with at least $100 billion of assets,” said Jaret Seiberg, an analyst at TD Cowen. “We would expect the Fed to advance proposals in the coming months.”
Alexa Philo, a former bank examiner for the Federal Reserve Bank of New York and senior policy analyst at Americans for Financial Reform, said the Fed could adopt stricter rules on its own, without relying on Congress.
“It is long past time to roll back the dangerous deregulation under the last administration to the greatest extent possible and pay close attention to the largest banks so this crisis does not worsen,” she said.
The Fed also criticized Silicon Valley Bank for tying executive compensation too closely to short-term profits and the company’s stock price. From 2018 to 2021, profit at SVB Financial, Silicon Valley Bank’s parent, doubled and the stock nearly tripled.
The report also pointed out that there were no pay incentives at the bank tied to risk management. Silicon Valley Bank notably had no chief risk officer at the firm for roughly a year, during a time when the bank was growing quickly.
The Fed’s report, which included the release of internal reports and Fed communications, is a rare look into how the central bank supervises individual banks as one of the nation’s bank regulators. Typically, such processes are rarely seen by the public, but the Fed chose to release these reports to show how the bank was managed up to its failure.
Bartlett Collins Naylor, financial policy advocate at Congress Watch, a division of Public Citizen, was surprised at the degree to which the Fed blamed itself for the bank failure.
“I don’t know that I expected the Fed to say ‘mea culpa’ — but I find that adds a lot of credibility” to Federal Reserve leadership, Naylor said.
Silicon Valley Bank was the go-to bank for venture capital firms and technology startups for years, but failed spectacularly in March, setting off a crisis of confidence for the banking industry. Federal regulators seized Silicon Valley Bank on March 10 after customers withdrew tens of billions of dollars in deposits in a matter of hours.
Two days later, they seized Signature Bank. Although regulators guaranteed all the banks’ deposits, customers at other midsize regional banks rushed to pull out their money — often with a few taps on a mobile device — and move it to the perceived safety of big money center banks such as JPMorgan Chase.
Although the withdrawals have abated at many banks, First Republic Bank in San Francisco appears to be in peril, even after receiving a $30 billion infusion of deposits from 11 major banks in March. The bank’s shares plunged 70% this week after it revealed the extent to which customers pulled their deposits in the days after Silicon Valley Bank failed.