Fed review pins blame failure of SVB on rule changes under Donald Trump

The failure of the Silicon Valley bank last month resulted from weak regulations during the Trump administration and missteps by internal supervisors who were too slow to correct management mistakes, the US Federal Reserve said in a scathing review of the bank’s collapse.

The long-awaited report, released on Friday, had harsh words for the Bank of California’s management, but blamed it squarely on changes brought about by bipartisan legislation in 2018, which loosened restrictions and oversight for all but the largest lenders.

The SVB would have been subject to stricter standards and more intense scrutiny were it not for efforts to reduce or “adapt” the rules in 2019 under Randall Quarles, the Fed’s former vice president for supervision, according to the central bank.

Ultimately, the Fed said, it undermined the supervisors’ ability to do their jobs.

“SVB’s regulatory standards were too low, SVB’s oversight did not act with sufficient strength and urgency, and contagion from company failures caused systemic consequences that the Fed’s framework had not contemplated,” Michael Barr, the Fed’s vice president for oversight who led An autopsy in a letter on Friday.

More specifically, changes under Trump that have led to “a shift in the attitude of supervisory policy have hampered effective oversight by reducing standards, increasing complexity, and promoting a less assertive supervisory approach,” he said.

According to documents released alongside the report, SVB supervisors found early in 2017 that the bank’s rapid growth and high turnover had “put pressure on” 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 asking the bank to fix deficiencies in the way it conducts itself and its exposure to adverse shocks. But SVB did not fully address the problems, prompting moderators to assess its management shortcomings.

Around that time, SVB’s rapid growth led to its being moved from one supervisory category to another, a transition the Fed said “complicated” the process. Had the bank received a “thorough assessment” before moving into the Fed’s so-called portfolio of large and foreign banking institutions, the report said, the risks could have been identified sooner.

By last fall, the supervisors had determined that “the simulation of bank interest rate risk is not reliable and requires improvement.” However, they failed to classify the problem as urgent and gave the administration until June 2023 to address it.

“The Fed did not seriously appreciate critical deficiencies in the company’s management, liquidity and interest rate risks,” the review said.

Part of the problem, the Fed found, was a “shift in culture and expectations” under Quarles. Citing interviews with employees, supervisors stated “pressure to reduce [the] burden on firms, fulfilling a higher burden of proof for a supervisory conclusion, and demonstrating due process when considering supervisory procedures.”

Quarles on Friday retracted the Fed’s assessment, saying it provided no evidence that changing expectations about supervision actually hampered how it handles the SVB.

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 the SVB.

The Fed report identified the San Francisco Reserve Bank as the institution ultimately responsible for the SVB’s assessment, but acknowledged that the Washington Fed’s Board of Governors “makes regulations . . and designs the programs used to oversee companies”. It found no evidence of “improper behavior”. ethical on the part of supervisors.

The Fed report also highlighted the role of technological change in the rapid collapse of SVB. “The combination of social media, a highly connected and focused depositor base, and technology may have fundamentally changed the velocity of bank inflows,” Barr said.

The review is the first official SVB failure report. Lawmakers have accused the regulators of failing to use the tools at their disposal and to act quickly to address problems once they are identified, with one prominent Republican accusing the 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 shortcomings.” It singled out the San Francisco chapter for failing to recommend issuance of a “single executive action” despite problems it described as “serious”.

Another report from the FDIC on Friday examined the reasons for the collapse of Signature Bank, which failed in early March just days after the SVB. The review places most of the blame on Signature executives, but also said the FDIC should have been faster and more comprehensive in addressing problems at the bank, which were identified by examiners early in 2018.

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

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

He called for some of the 2019 changes to be rolled back, particularly those that allowed medium-sized banks to exclude unrealized losses on their securities portfolios from their capital accounts. Barr also wanted a new regulatory regime to keep track of banks that were growing rapidly or focusing on unique lines of business, as SVB was.

He also argued that the SVB salary scheme did not focus enough on risk, so the regulator should consider setting “stricter minimum standards” for executive pay.

Federal Reserve Chairman Jay Powell endorsed Barr’s recommendations, saying he was “confident they will lead to a stronger and more resilient banking system.”

But Elizabeth Warren, a progressive Democratic US senator from Massachusetts, said in a statement Friday that Powell needs to be “accountable,” after he “failed in his responsibility to supervise and regulate banks that are a systemic risk to our economy.”