Evening Brief – 04.28.23
The Federal Reserve called for more vigorous banking oversight while admitting to its own failures in a widely anticipated report published Friday into the collapse of Silicon Valley Bank (SVB) last month.
The report, authored by Fed staff and Michael Barr, the Fed’s vice chair for supervision, took a critical look at what the Fed missed at SVB. 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.
“The Federal Reserve did not appreciate the seriousness of critical deficiencies in the firm’s governance, liquidity and interest rate risk management,” the report noted.
The Fed also said, based on its own report, it planned to reexamine how it regulates banks the size of SVB, which had more than $200bn in assets when it failed. One criticism that has arisen from SVB’s failure is that the Fed and other regulators took a lighter approach to supervision for mid-size banks following the passage of a 2018 banking law that eased some of the tougher restrictions on the industry after the 2008 financial crisis.
Barr was also particularly harsh toward SVB’s leadership, slamming it for what he called a “textbook case of mismanagement by the bank. Its senior leadership failed to manage basic interest rate and liquidity risk.”
The report looked at the role social media and technology played in the bank’s last days. While the bank’s management was poor and ultimately that was the reason the bank failed, the report noted that social media caused a bank run that happened in just hours, compared with days for earlier bank runs like those seen in 2008.
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, these processes are confidential and rarely seen by the public, but the Fed chose to release the report to show how the bank was managed up to its failure.
The bank chaos still hasn’t been resolved. First Republic could fail despite an earlier rescue effort in which the nation’s largest banks poured $30 billion into the institution. The bank is said to be on the verge of falling into FDIC receivership due to a prolonged stock slide and massive losses in market cap, and cascading outflows of deposits.