Silicon Valley Bank’s failure last month stemmed from weakened regulations during the Trump administration and mis-steps by internal supervisors who were too slow to correct management blunders, the US Federal Reserve said in a scathing review of the lender’s implosion.
The long-awaited report, released on Friday, had harsh words for the California bank’s management but also pinned the blame directly on changes stemming from bipartisan legislation in 2018, which eased restrictions and oversight for all but the biggest lenders.
SVB would have been subject to more stringent standards and more intense scrutiny had it not been for efforts to scale back or “tailor” the rules in 2019 under Randal Quarles, the Fed’s former vice-chair for supervision, according to the central bank.
That ultimately undermined supervisors’ ability to do their jobs, the Fed said.
“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,” Michael Barr, the Fed’s vice-chair for supervision who led the postmortem, said in a letter on Friday.
More specifically, the Trump-era changes that led to a “shift in the stance of supervisory policy impeded effective supervision by reducing standards, increasing complexity, and promoting a less assertive supervisory approach”, he said.
According to documents released alongside the report, SVB’s supervisors found as early as 2017 that rapid growth and high employee turnover at the bank had “placed a strain on” the ability of compliance and risk experts to challenge senior management and “effectively identify and monitor key risks”.
In 2021, supervisors issued six citations requiring the bank to fix deficiencies in the way in which it was managing itself and its exposure to adverse shocks. But SVB did not fully address the problems, leading supervisors to rate its management deficient.
Around that time, SVB’s rapid growth had moved it from one supervisory category to another, a transition the Fed said “complicated” the process. Had the bank received a more “thorough evaluation” before moving up into the Fed’s so-called Large and Foreign Banking Organization portfolio, risks would have been identified sooner, the report said.
By last autumn, supervisors had determined that the bank’s “interest rate risk simulations are not reliable and require improvements”. Yet they failed to classify the problem as urgent and gave management until June 2023 to address it.
“The Federal Reserve did not appreciate the seriousness of critical deficiencies in the firm’s governance, liquidity, and interest rate risk management,” the review said.
Part of the problem was “a shift in culture and expectations” under Quarles, the Fed found. Citing interviews with staff, supervisors reported “pressure to reduce [the] burden on firms, meet a higher burden of proof for a supervisory conclusion, and demonstrate due process when considering supervisory actions”.
Quarles on Friday pushed back on the Fed’s assessment, saying it provided no evidence that shifting expectations about supervision actually impeded how SVB was handled.
He also said the Fed failed to acknowledge “very specific and detailed supervisory instructions” in place since 2010 that provided a framework for how to deal with the very risks that plagued SVB.
The Fed’s report identified the San Francisco Reserve Bank as the institution ultimately responsible for assessing SVB, but acknowledged the Fed’s board of governors in Washington both “establishes the regulations . . . and designs the programmes used to supervise firms”. It found no evidence of “unethical behaviour on the part of supervisors”.
The Fed’s review also highlighted the role of technological change in SVB’s rapid collapse. “The combination of social media, a highly networked and concentrated depositor base, and technology may have fundamentally changed the speed of bank runs,” Barr said.
The review is the first official report on SVB’s failure. Lawmakers have accused regulators of failing to use the tools at their disposal and to act quickly to address problems once they were identified, with one leading Republican accusing authorities of being “asleep at the wheel”.
In a separate independent report also released on Friday, the US Government Accountability Office concluded that the Fed’s supervisory actions were “inadequate given the bank’s known liquidity and management deficiencies”. It singled out the San Francisco branch for failing to recommend the issuance of a “single enforcement action” despite problems it described as “serious”.
Another report from the Federal Deposit Insurance Corporation on Friday examined the causes of the collapse of Signature Bank, which failed in early March just days after SVB. The review lays most of the blame with Signature’s executives, but also said that the FDIC should have been swifter and more thorough in addressing problems at the bank, which were flagged by examiners as early as 2018.
Political divides have emerged over whether regulatory changes are necessary, with the Biden administration calling for a reversal of the Trump-era rules and stronger liquidity and capital requirements for banks with $100bn to $250bn in assets. Republicans for the most part have said new legislation was unnecessary.
Barr on Friday signalled his support for stronger supervision and regulation for banks with more than $100bn in assets, changes that would not require congressional approval.
He advocated rolling back some of the 2019 changes, particularly one that allowed midsized banks to exclude unrealised losses in their securities portfolios from their capital accounts. Barr also wanted a new regulatory regime to track banks that were growing quickly or focused on unique lines of business, as SVB was.
He also argued that SVB’s pay plan did not focus enough on risk so the regulator should consider setting “tougher minimum standards” for executive pay.
Fed chair Jay Powell backed Barr’s recommendations, saying he was “confident they will lead to a stronger and more resilient banking system”.
But Elizabeth Warren, the progressive Democratic US senator from Massachusetts, said in a statement on Friday that Powell needed to be “held accountable”, having “failed in his responsibility to supervise and regulate banks that posed a systemic risk to our economy”.