Federal Reserve review blames SVB failure on Donald Trump-era rule changes

by The Insights

Silicon Valley Bank’s failure last month was due to weaker regulation under the Trump administration and mistakes by internal supervisors who were too slow to correct mismanagement, the U.S. Federal Reserve said in a statement. a scathing examination of the lender’s implosion.

The long-awaited report, released on Friday, had harsh words for California bank management, but also directly blamed changes stemming from bipartisan legislation in 2018, which eased restrictions and oversight for all but the largest lenders. .

SVB would have faced tougher standards and greater scrutiny if there hadn’t been efforts to scale back or ‘tweak’ the rules in 2019 under Randal Quarles, the former Fed vice chairman for supervision, according to the central bank.

This ultimately undermined the ability of supervisors to do their jobs, the Fed said.

“Regulatory standards for SVB were too low, oversight of SVB did not operate with sufficient force and urgency, and the contagion of business failure led to systemic consequences not contemplated by the executive. ‘adapting the Federal Reserve,’ Michael Barr, the Fed’s vice chairman for oversight who led the autopsy, said in a letter Friday.

Specifically, the Trump-era changes that led to a “shift in the focus of surveillance policy have hindered effective surveillance by lowering standards, increasing complexity, and promoting a less assertive approach to surveillance”, did he declare.

According to documents released alongside the report, SVB supervisors found as early as 2017 that the bank’s rapid growth and high employee turnover had “stretched” the ability of compliance and risk experts. to challenge senior management and to “effectively identify and monitor keys. risks”.

In 2021, supervisors issued six citations demanding the bank address shortcomings in the way it managed itself and its exposure to adverse shocks. But SVB did not fully address the issues, leading supervisors to label their management as flawed.

At that time, SVB’s rapid growth had moved it from one category of oversight to another, a move the Fed said “complicated” the process. Had the bank received a “further assessment” before moving into the portfolio of the Fed’s so-called large foreign banking organization, the risks would have been identified sooner, the report said.

Last fall, supervisors determined that “the bank’s interest rate risk simulations are unreliable and need improvement.” Still, they didn’t call the issue urgent and gave management until June 2023 to fix it.

“The Federal Reserve failed to appreciate the seriousness of the critical shortcomings in corporate 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] companies, meet a higher burden of proof for a prudential conclusion and exercise due process when considering prudential actions”.

Quarles pushed back on the Fed’s assessment on Friday, saying it provided no evidence that changing expectations for oversight had actually hampered the way SVB was run.

He also said the Fed failed to acknowledge “very specific and detailed oversight guidance” in place since 2010 that provided a framework for how to manage the very risks that plagued SVB.

The Fed report identified the San Francisco Reserve Bank as the institution ultimately responsible for assessing the SVB, but acknowledged that the Fed’s Board of Governors in Washington “sets the regulations. . . and designs business monitoring programs”. He found no evidence of “unethical behavior by supervisors”.

The Fed review also highlighted the role of technological change in SVB’s rapid collapse. “The combination of social media, a highly connected 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 not using the tools at their disposal and moving quickly to address issues once they are identified, with one leading Republican accusing authorities of being “sleepy at the wheel”.

In a separate independent report also released on Friday, the US Government Accountability Office concluded that the Fed’s oversight measures were “inadequate given the bank’s known shortcomings in liquidity and management.” He singled out the San Francisco branch for not recommending the issuance of a “single enforcement action” despite issues it called “serious.”

Another report from the Federal Deposit Insurance Corporation on Friday examined the causes of the collapse of Signature Bank, which went bankrupt in early March just days after SVB. The review largely blames Signature executives, but also said the FDIC should have been quicker and more thorough in resolving the bank’s problems, which were reported by reviewers as early as 2018.

Political divisions have emerged over the need for regulatory changes, with the Biden administration calling for a reversal of Trump-era rules and tougher liquidity and capital requirements for banks with $100 billion to $250 billion in assets. ‘assets. Republicans have mostly said new legislation is unnecessary.

Barr on Friday signaled his support for stronger supervision and regulation for banks with more than $100 billion in assets, changes that would not require congressional approval.

He advocated rolling back some of the 2019 changes, particularly one that allowed mid-sized banks to exclude unrealized losses from their securities portfolios from their capital accounts. Barr also wanted a new regulatory regime to keep up with banks that were growing rapidly or focusing on unique lines of business, as SVB was.

He also argued that SVB’s compensation plan did not place enough emphasis on risk, so the regulator should consider setting “stricter minimum standards” for executive pay.

Fed Chairman 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 U.S. senator from Massachusetts, said in a statement on Friday that Powell must be “held accountable” having “failed in her responsibility to oversee and regulate banks that posed a systemic risk to our economy.”

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