Mar 28, 2023 - Economy

The huge question created by SVB's failure

Michael Barr, vice chair for supervision at the Federal Reserve, shakes hands with Sen. Tim Scott, a Republican from South Carolina and ranking member of the Senate Banking, Housing, and Urban Affairs Committee. Photo: Samuel Corum/Bloomberg via Getty Images

When bank supervisors do their best work, you will not hear about it. You will never read about how a heroic bureaucrat identified a risk to an institution's health, flagged it to management and, as a result, the bank didn't fail.

  • By design, most bank supervision work is strictly confidential, and "Local bank remains open" is not the stuff of newspaper front pages.

Why it matters: We're getting more granular detail about what went horribly wrong at Silicon Valley Bank (SVB). But a huge open question is not whether bank supervisors can identify problems — it's clear in this case that they did — but what ought to happen when they do.

  • The problems that caused it to unravel — prompting an extraordinary government response to back the entire banking system — were identified early by the supervisors scrutinizing the bank.
  • But they were evidently unable to force the issue and insist that the bank improve its risk management and reduce its exposure to rising interest rates and deposit flight, until it was too late.

Driving the news: In the first of what will likely be many public inquiries about the failures of SVB and Signature Bank, leaders of the Fed, the Treasury and the FDIC are testifying Tuesday before the Senate Banking Committee.

  • Fed vice chair for supervision Michael Barr listed the many ways regulators had identified problems long before SVB failed, including finding six areas of deficiency near the end of 2021; three more in May 2022; and concluding the bank's management was deficient in the summer of last year.
  • This past October, Barr testified, supervisors met with SVB senior management about interest rate risk, and delivered another formal finding in November.
  • FDIC chair Martin Gruenberg stunned with news that SVB's top 10 depositors had a combined $13.3 billion parked there. That implies it had customers big enough to know better — keeping more than $1 billion in cash at a single mid-sized bank.

The intrigue: So far at least, regulators have no good answers for why, despite all that evidence of excessive risk, this all remained confined to confidential reports among bank supervisors, their bosses and SVB management.

  • Meanwhile, the Fed and other officials lacked the ability or the will to force changes.

What they're saying: "I hope to learn how the Fed could know about such risky practices for more than a year and fail to take definitive, corrective action," said Sen. Tim Scott of South Carolina, the ranking Republican on the committee.

  • "Our regulators appear to have been asleep at the wheel."
  • "It looks to me like the regulators knew the problem, but nobody dropped the hammer," said Sen. Jon Tester, a Democrat from Montana.

The bottom line: The real work of bank supervision may take place in the shadows, but it doesn't work if policymakers don't act on what those supervisors learn.

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