Fed plans to review banking supervision after SVB crash – 04/28/2023 – Market

The Fed (Federal Reserve) issued a detailed and scathing assessment on Friday of its failure to identify problems and push for corrections at Silicon Valley Bank before the U.S. bank’s collapse, and pledged stricter supervision and stricter rules for institutions. financial.

In what the Fed’s vice chair of supervision, Michael Barr, called a rigid review of the U.S. central bank’s supervision of the SVB, the Fed said monitoring of the Santa Clara, Calif.-based institution was inadequate and that the regulatory standards were very low.

“The SVB’s failure demonstrates that there are weaknesses in regulation and oversight that must be addressed,” Barr said in a letter accompanying a 114-page report supplemented by confidential materials that are not normally disclosed.

While it was the regional bank’s own mismanagement of core risks that was at the root of the failure, the Fed said, supervisors at the SVB did not fully assess the problems, delayed their responses to gather more evidence, even as weaknesses increased, and failed in prioritizing certain deficiencies when they were identified.

At the time of its bankruptcy, SVB had 31 unresolved citations about its safety and soundness, triple what its peers in the banking sector had, the report said.

One particularly effective change the Fed could make to oversight would be to put mitigants in place quickly in response to serious capital, liquidity or management issues, a senior Fed official said.

Increased capital and liquidity requirements would also have bolstered the resilience of the SVB, the Fed added. Barr said that as a result of the failure, the central bank will re-examine how it oversees and regulates liquidity risk, starting with the risks of unsecured deposits.

ENCOURAGE SUPERVISION

The realization that smaller banks are capable not only of wreaking havoc in the broader financial system, but also of doing so with such speed, has forced a reassessment of the Fed’s supervisory model.

In its report, the Fed said that from 2018 to 2021 its supervisory practices changed and there were growing expectations that supervisors would accumulate more evidence before considering action. Staff interviewed as part of the Fed’s review reported pressure during this period to reduce burdens on businesses and demonstrate due process, the report said.

Barr signaled in his letter on Friday that that situation would change. “We need to develop a culture that empowers supervisors to act in the face of uncertainty,” he said.

The Fed is considering tying executive compensation to fixing problems at banks designated as poor management in order to focus executive attention on those problems, a senior Fed official said in a document.