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The Federal Reserve was too timid in tackling problems at Silicon Valley Bank and misdiagnosed why the lender collapsed, according to a new report into the 2023 crisis that has triggered an overhaul of the US central bank’s approach.
Michelle Bowman, who oversees banking supervision at the Fed as its vice-chair for supervision, said the report she commissioned was “not about assigning blame” but added the shortcomings and vulnerabilities it uncovered required meaningful reform.
There are fears, however, that the in-depth review by consultancy Starling Advisory Group could be used as a political weapon to attack Bowman’s predecessor Michael Barr, who is still on the Fed board and has criticised the recent shift to ease US banking regulations.
Starling’s findings are expected to contradict many of the conclusions in the Fed’s initial report on the causes of SVB’s collapse, which was written by Barr before he proposed a major tightening of restrictions on US banks in response to the 2023 crisis.
Bowman said the latest review had dismissed claims that the Fed’s failure to tackle the problems at SVB was caused by earlier moves to ease bank regulation. It also found “no evidence that social media accelerated the run” on SVB, as the 2023 Fed report had said.
Fed officials failed to tackle problems at SVB three years ago because of a “culture of risk aversion”, Bowman said. Supervisors “knew, or should have known” about the numerous vulnerabilities that ultimately caused the lender to fail and triggered a wider crisis.
“Staff believed it was personally safer to take no action unless they were certain the action was exactly right,” she said. “A lack of clarity regarding decision rights compounded this culture of risk aversion.”
In the future, bank examiners at the Fed will be required to submit monthly reports to their heads of supervision at a regional level, identifying any issues or concerns and seeking clarity on whether they should take action.
California-based SVB was the second-biggest bank failure in US history, sending a wave of anxiety through the system that also caused Signature Bank and First Republic to collapse. The turmoil only subsided when regulators guaranteed all uninsured bank deposits.
Bowman said SVB’s failure was caused by large unrealised accounting losses on its US government debt holdings that fell in value after a sharp rise in interest rates in 2022, as well as flighty deposits from tech companies that were largely uninsured.
It also suffered from “a lack of operational readiness” to borrow from the Fed against its assets after being hit by large deposit withdrawals.
The bank had been given dozens of formal warnings by regulators shortly before its crisis. But many of these were about its technology, compliance and operational risks and not the financial vulnerabilities that ultimately led to its downfall, the report found.
US regulators have recently announced plans to narrow their focus on core financial risks at banks, while downgrading the attention given to other issues.
Bowman said the central bank was “addressing the culture problem head-on” by prioritising threats to banks’ financial health or the stability of the wider system, instead of “focusing excessively on procedural or documentation footfalls”.