Fed Watchdog Faults Central Bank Officials on Oversight of SVB

(Bloomberg) — The Federal Reserve’s bank supervision officials failed to step up their oversight and scrutiny of risks at Silicon Valley Bank before its collapse in March, the US central bank’s internal watchdog said in a new report.

(Bloomberg) — The Federal Reserve’s bank supervision officials failed to step up their oversight and scrutiny of risks at Silicon Valley Bank before its collapse in March, the US central bank’s internal watchdog said in a new report.

The regional bank examination approach “for SVB did not evolve with SVB’s growth and increased complexity,” the Fed inspector general said in a report released Thursday. The Board of Governors in Washington and the San Francisco Fed examiners did not effectively transition SVB to the large bank examination process, the IG said in the review of the bank’s failure. 

“With the benefit of hindsight,” the IG said, “we noted multiple instances in which the Board and FRB San Francisco should have acted earlier or taken stronger action to address identified weaknesses at SVB.”

The Fed’s internal watchdog said examiners should have closely scrutinized the risks from rising interest rates on SVB’s investment securities portfolio. The report also criticized SVB management, which “failed to appreciate the significance of the multiple layers of risks or recognize the vulnerabilities inherent in the bank’s condition.”

Comprehensive Review

In response to the review, Michael Gibson, the Fed’s director of supervision and regulation, said his unit is engaged in a “comprehensive review” of the way it supervises regional banks, increasing oversight in areas such as capital planning, enterprise risk management, and liquidity. “Training will be developed,” Gibson said, noting this effort will be completed by December 2024.

The inspector general also said former SVB Financial Group CEO Greg Becker’s position on the San Francisco Fed Board created “an appearance of a conflict of interest” at the Fed as the bank was being downgraded by San Francisco supervisors. The watchdog asked the Fed to “consider whether standards for service and removal can be established for class A directors currently employed by supervised institutions.”

Becker stepped down from the regional Fed board in March, around the same time SVB collapsed following a run on deposits.

Read more: The Search for Lessons From 2023 Bank Failures: QuickTake

Silicon Valley Bank became the third-largest bank failure in US history and sent shock waves through the financial system, causing the US Treasury to take the unusual step of insuring all deposits at the bank, while the Fed launched an emergency lending facility to shore up bank liquidity.

Today’s report follows Fed Vice Chair for Supervision Michael Barr’s own detailed analysis in April of the collapse.

Barr called the failure “a textbook case of mismanagement” and blamed Fed supervisors for lacking “forceful enough action.” He also pointed to his predecessor, Randal Quarles, saying a “shift in culture” changed how “supervision was executed.”

Supervisory Ratings

A separate review by the Government Accountability Office in April said the supervisors based at the San Francisco Fed “lacked urgency.” The regulator was “generally positive” in its CAMELS ratings of SVB from December 2018 to June 2022, when it downgraded the overall composite rating to “less than satisfactory,” the report found.

CAMELS ratings are a key metric that regulators use to evaluate a bank’s strength and the likelihood that the lender could struggle under stress. They test for capital adequacy, asset quality, management, earnings components, risk of running low on cash and sensitivity to market risk.

Thursday’s IG report said that while examiners noted the bank’s significant asset growth was outpacing its risk management practices, examiners “missed an opportunity to send SVB a stronger message” by not further downgrading the management component of the firm’s CAMELS score.

The rapid failures of SVB and Signature Bank in March spotlighted gaps in oversight for midsize lenders. In response, top banking regulators have proposed that banks with as little as $100 billion in assets be required to issue enough long-term debt to help cover capital losses in times of severe stress. They have also proposed a rule that would bolster resolution plans for bank holding companies and foreign banking firms with more than $250 billion in assets. 

These requirements would help bring midsize banks’ readiness for a potential crisis more in line with that of the nation’s largest lenders, the regulators have said.

(Updates with additional findings from the report starting in fifth paragraph.)

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