In the wake of the recent failures of Silicon Valley Bank (SVB) and Signature Bank, US regulators, including the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC), are reevaluating their bank oversight policies.
Both regulatory bodies have admitted to supervisory lapses leading up to the collapses and are now pledging to strengthen supervision and enforce stricter rules for banks.
Regulators vow to strengthen supervision
The Federal Reserve has recognized its shortcomings in identifying and addressing problems at Santa Clara-based SVB. In a letter accompanying a 114-page report, Fed Vice Chair of Supervision Michael Barr stated, “Our first area of focus will be to improve the speed, force, and agility of supervision.”
The report, supplemented by typically undisclosed confidential materials, documented escalating concerns about lax risk management but showed little regulatory action.
Barr also indicated plans to apply stricter standards currently reserved for larger institutions to banks with assets exceeding $100 billion.
These heightened capital and liquidity requirements aim to enhance the resilience of banks like SVB, whose failure has demonstrated the need for more stringent regulations.
In a separate 63-page account, the FDIC detailed its shortcomings in supervising the collapse of New York-based Signature Bank, as well as the bank management’s failure to address persistent weaknesses in liquidity risk management and an over-reliance on uninsured deposits.
The FDIC admitted, “In retrospect, the FDIC could have acted sooner and more forcefully to compel the bank’s management and its board to address these deficiencies more quickly and more thoroughly.”
Primary blame on SVB’s management
Both reports assigned the primary blame for the failures to the banks’ managers, who prioritized growth while ignoring fundamental risks.
The regulators also identified supervisory misjudgments but stopped short of attributing responsibility for the failures to any specific senior leaders within their oversight ranks.
The FDIC did, however, mention Signature’s former CEO Joseph DePaolo, who personally “rejected” examiner concerns about uninsured depositors on March 10, the day of the bank’s devastating run.
Former SVB CEO Greg Becker was mentioned only once in the Fed’s report, in reference to his concurrent position on the board of directors at the San Francisco Fed.
To improve management compliance, the Fed is considering tying prompt fixes to executive compensation, according to a senior Fed official. The official argued that better compliance could have prevented the collapses of SVB and Signature Bank.
Regulatory resources insufficient for oversight
The rapid growth of SVB and Signature Bank in recent years has outpaced the ability of regulators to keep up, particularly with dwindling resources.
The Fed’s supervision headcount declined by 3% between 2016 and 2022, while assets in the banking sector grew by 37%. Similarly, the FDIC reported that since 2020, approximately 40% of positions in its large bank supervisory staff in the New York region were either vacant or filled by temporary employees.
As regulators work to strengthen oversight and prevent future bank failures, the repercussions of the SVB and Signature Bank collapses continue to affect the financial sector.
San Francisco-based First Republic Bank is currently struggling for survival after reporting deposit outflows exceeding $100 billion following the failures of SVB and Signature Bank.