Federal Reserve Criticized for Failure to Prevent Silicon Valley Bank Collapse and Potential Changes to Supervision

The Federal Reserve has been criticized for its failure to prevent the collapse of Silicon Valley Bank (SVB) last month.[0] The central bank's review found that SVB's board of directors and management did not manage their risks properly, and that Fed supervisors did not appreciate the extent of those risks as SVB grew in size from $71 billion in 2019 to more than $211 billion in 2021 without facing stricter standards.[1] When Fed officials did notice problems with the bank, they did not take sufficient steps to ensure that SVB corrected its deficiencies.[2] The Fed's approach to “tailoring” bank rules also undermined effective supervision “by reducing standards, increasing complexity, and promoting a less assertive supervisory approach.”[2]

The collapse of SVB, the nation's 16th largest bank, set off a financial panic that led to the failure two days later of another major lender, Signature Bank.[3] First Republic Bank is on the verge of collapse, and investors are still anticipating further distress six weeks after regional banks were particularly impacted.[4]

Michael Barr, the Fed's vice chair for supervision, outlined a slew of potential changes to how the Fed oversees financial institutions, from capital and liquidity requirements to annual stress testing.[5] The changes would not require legislative approval, a senior Fed official told reporters, but would likely take several years to complete.[5] During his Congressional testimony last month, Barr suggested that banks possessing assets exceeding $100 billion might require greater monitoring, likely involving more stringent capital and liquidity regulations.[6] Regulators have shown interest in examining the federal insurance scheme safeguarding deposits.[6]

The House Oversight Committee has launched an investigation into the role the Federal Reserve Bank of San Francisco and other state and federal regulators played in the March failure of Silicon Valley Bank.[7] Barr said that the central bank would welcome external reviews of SVB's failure, including from Congress.[8]

“While higher supervisory and regulatory requirements may not have prevented the firm's failure, they would likely have bolstered the resilience of Silicon Valley Bank,” Barr said in the report.[1]

0. “Fed's Barr: ‘Weaknesses in supervision and regulation must be fixed'” American Banker, 28 Apr. 2023, https://www.americanbanker.com/news/feds-barr-weaknesses-in-supervision-and-regulation-must-be-fixed

1. “Fed, NYDFS assess their supervisory performance after March’s big bank failures” Cointelegraph, 28 Apr. 2023, https://cointelegraph.com/news/fed-nydfs-assess-their-supervisory-performance-after-march-s-big-bank-failures

2. “Fed says it must strengthen banking rules after SVB's collapse” The Washington Post, 28 Apr. 2023, https://www.washingtonpost.com/business/2023/04/28/silicon-valley-bank-collapse-investigation

3. “Federal Reserve says it ‘failed' in run up to Silicon Valley Bank collapse” ABC News, 29 Apr. 2023, https://abcnews.go.com/Business/federal-reserve-failed-run-silicon-valley-bank-collapse/story?id=98936669

4. “Fed autopsy on SVB details grave mismanagement” The Mercury News, 28 Apr. 2023, https://www.mercurynews.com/2023/04/28/fed-autopsy-on-svb-details-grave-mismanagement/

5. “Here's the Fed's Plan for Tighter Bank Oversight After SVB's Failure” Bloomberg, 28 Apr. 2023, https://www.bloomberg.com/news/articles/2023-04-28/here-s-the-fed-s-plan-for-tighter-bank-oversight-after-svb

6. “Meet the man charged with finding out why Silicon Valley Bank failed” The Washington Post, 19 Apr. 2023, https://www.washingtonpost.com/business/2023/04/19/svb-bank-failure-michael-barr/

7. “House Investigating SF Fed's Role in SVB Collapse as Regulators Prepare Reports” Barron's, 27 Apr. 2023, https://www.barrons.com/articles/house-investigating-sf-feds-role-svb-collapse-e40862fa

8. “Fed blames Trump-era policies, SVB leaders — and itself — for bank's stunning collapse” POLITICO, 28 Apr. 2023, https://www.politico.com/news/2023/04/28/fed-trump-svb-collapse-barr-00094413

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