Updated Apr 28, 2023 - Economy

Fed will consider tougher banking rules after SVB failure

Fed vice chair for supervision Michael Barr testifies during a hearing on recent bank failures last month. Photo: Stefani Reynolds /AFP via Getty Images

The Federal Reserve is considering stricter regulations for banks after an internal review found that looser rules were one key culprit behind Silicon Valley Bank's collapse — the second-largest bank failure in U.S. history.

Why it matters: The review, released Friday, lays blame on the bank itself, as well as Fed supervisors charged with overseeing it and a regulation rollback, for the failure. The episode forced the government to take extraordinary action to backstop the banking system.

What they're saying: "SVB's failure demonstrates that there are weaknesses in regulation and supervision that must be addressed," Michael Barr, the Fed's vice chair for supervision who led the review, said in a statement.

  • In a press release, Fed chair Jerome Powell endorsed that takeaway, saying he supported "recommendations to address our rules and supervisory practices."

Details: The 114-page report, completed in a little over a month, is the most comprehensive look so far at the failures on the parts of supervisors and bank executives that led to the collapse of the bank.

  • But underpinning those failures are 2019 changes that loosened regulations and requirements for financial institutions similarly sized to Silicon Valley Bank, Barr said.

Where it stands: Those rule changes, which came in response to federal legislation, and a "shift in the stance of supervisory policy impeded effective supervision by reducing standards, increasing complexity, and promoting a less assertive supervisory approach," Barr said.

  • Barr said that the Fed plans to reevaluate those rule changes, which applied to banks with $100 billion or more in assets.

The big picture: Barr also proposed tougher rules related to capital and liquidity requirements, as well as the format of periodic stress tests — all of which had been under consideration before Silicon Valley Bank's failure. The event, however, intensified the urgency for review, according to senior Fed officials.

  • Barr is also looking to improve "speed, force, and agility of supervision," all of which he said appeared to fall short in the case of Silicon Valley Bank.

Of note: A senior Fed official was confident the recommendations would be approved. But even if that's the case, the process is lengthy so any new rules — particularly those related to liquidity requirements — likely wouldn't take effect for several years.

Between the lines: The report details the extent to which some of Silicon Valley Bank's troubles were identified by Fed supervisors but not followed up on.

  • Silicon Valley Bank's "foundational problems were widespread and well-known, yet core issues were not resolved, and stronger oversight was not put in place," the report says.
  • For instance, by the time Silicon Valley Bank failed, it had accumulated 31 supervisory warnings — triple the average received by peers — about a list of issues that ultimately led to the bank's demise.
  • The bank's supervisors also identified problems in the bank's interest rate risk management in annual exams dating back to 2020, but did not issue findings until 2022. Supervisors planned to downgrade a key rating for the Silicon Valley Bank, but the bank collapsed before that rating was finalized.

Meanwhile: The FDIC on Friday released a report of its own, on the failure of Signature Bank. This agency, too, highlights weaknesses in its supervision — but it blames those failings in part on being under-staffed.

  • The document also reads as a scathing report card on Signature Bank's management and board, who the FDIC says are ultimately to blame for the bank's failure.
  • Management "did not prioritize good corporate governance practices, did not always heed FDIC examiner concerns, and was not always responsive or timely in addressing FDIC supervisory recommendations," according to the report.
  • They also dropped the ball when it comes to crypto, the report finds. "[Signature] failed to understand the risk of its association with and reliance on crypto industry deposits or its vulnerability to contagion from crypto industry turmoil that occurred in late 2022 and into 2023," it said.

Worth noting: A separate report from the GAO, also issued Friday, highlights inadequate bank supervision in both banks' failures.

The bottom line: The regulatory response to this year's bank failures — which may soon include another one — is only just beginning.

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