WASHINGTON: US regulators today put large banks on notice that tougher oversight is coming, after the Federal Reserve and Federal Deposit Insurance Corporation detailed their supervisory lapses before deposit runs caused the collapse of Silicon Valley Bank and Signature Bank in March.
Though the banking sector broadly has since stabilised, the far-reaching impact of the failures of those two large regional banks was felt yesterday as an even larger lender, First Republic Bank, teetered on the brink of collapse.
Regulators were preparing to shut San Francisco-based First Republic, a person familiar with the matter told Reuters.
Depositors had pulled US$100 billion from accounts at the bank in the panic triggered by the SVB and Signature failures, imperiling its survival.
The Fed’s assessment of its inadequacies in identifying problems and pushing for fixes at Santa Clara, California-based SVB came with promises for tougher supervision and stricter rules for banks.
“Our first area of focus will be to improve the speed, force, and agility of supervision,” Fed vice-chair of supervision Michael Barr said in a letter accompanying a 114-page report supplemented by confidential materials that are typically not made public and which documented rising concern – but little action – over lax risk management.
Barr also signalled plans to subject banks with more than US$100 billion in assets to rules currently reserved for bigger rivals, given that increased capital and liquidity requirements would have bolstered SVB’s resilience.
“Our experience following SVB’s failure demonstrated that it is appropriate to have stronger standards apply to a broader set of firms.”
Separately, the FDIC delivered a 63-page account of its failings in the collapse of Signature, and those of the New York-based lender’s management, to fix persistent weaknesses in liquidity risk management and over-reliance on uninsured deposits.
Both SVB and Signature failed last month.
“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,” it said.
Both reports said the banks’ managers were primarily to blame for prioritising growth and ignoring basic risks that set the stage for the failures.
And while they both identified supervisory misjudgments – the Fed’s report was particularly scathing – both stopped short of laying the responsibility for the failures at the feet of any specific senior leaders inside their oversight ranks.
The FDIC did point to Signature’s ex-CEO Joseph DePaolo, though not by name, as having personally “rejected” examiner concerns about uninsured depositors on March 10, the day of the bank’s crippling run.
Former SVB CEO Greg Becker was mentioned only once in the Fed’s report – in reference to his having also been on the board of directors at the San Francisco Fed.
Before the twin failures in March, banking regulators had focused most of their firepower on the very biggest US banks that were seen as critical to financial stability.
At the Fed that was in part due to new central bank “tailoring” regulations written in 2018 under Barr’s predecessor, Randal Quarles, the report said, and to a shift in expectations for supervisors to accumulate more evidence before considering taking action.
Fed staff said they felt pressure during this period to reduce burdens on firms and demonstrate due process, according to the report.
Quarles did not immediately respond to a request for comment.
The lack of forceful examiner action was a “clear failure of supervisory culture”, said senator Tim Scott, the top Republican on the Senate Banking Committee.
Scott, a potential US presidential candidate in 2024, pushed back on re-imposing stricter rules that he said would punish well-run banks for the “unique” problems of their failed competitors.
Industry did as well.
“The Federal Reserve’s report lays blame at changes to regulation and supervision made in recent years, when its own examination materials make plain the fundamental misjudgments made by its examination teams over that same period,” Greg Baer, the president and CEO of the Bank Policy Institute, said in a statement.
Still, any changes would give banks plenty of time to adjust, noted Eric Compton, a banking analyst at Morningstar.
“I think many investors were worried about the regulators dropping the hammer on the whole banking industry, quickly.”
At SVB, the Fed said, supervisors did not fully appreciate the problems and failed to appropriately escalate certain deficiencies even after they were identified.
At the time of its failure, SVB had 31 unaddressed citations on its safety and soundness, triple what its peers in the banking sector had, the US central bank’s report said, including problems with interest-rate-risk modeling that examiners directed be addressed by June 2023.
Regulators shut SVB on March 10, a day after customers withdrew US$42 billion and queued requests for another US$100 billion the following morning.
The Fed is considering forcing better compliance from management by tying prompt fixes to executive compensation, a senior Fed official indicated yesterday.
Both SVB and Signature grew quickly in recent years, outpacing the ability of regulators to keep up, especially with shrinking resources.
Between 2016 and 2022, as assets in the banking sector grew 37%, the Fed’s supervision headcount declined by 3%, according to the report.
In regards to Signature since 2020, an average of 40% of positions in the FDIC’s large bank supervisory staff in the New York region were vacant or filled by temporary employees, the FDIC report said.
Signature’s failure, the FDIC said in its report, was caused by “poor management” and a pursuit of “rapid, unrestrained growth” with little regard for risk management.
Regulators closed Signature two days after SVB was shuttered.
Signature lost 20% of its total deposits in a matter of hours on the day that SVB failed, FDIC chair Martin Gruenberg has said.