Regulators Share and Spread Blame for Bank Failures

Three separate reports aim to shed light on missteps behind current banking crisis.

Poor bank management, along with significant lapses in supervision and enforcement led to the failures of Silicon Valley and Signature Bank, federal regulators said Friday.

The Federal Reserve issued a report on Silicon Valley Bank saying that, in addition to poor management and supervision, social media, the Trump Administration and Congress all contributed to the bank’s demise.

In an FDIC report on Signature Bank, the agency questioned the competency of bank management and said that staffing shortages in New York and Washington contributed to a lack of proper oversight.

Additionally, the Government Accountability Office issued its own report on the failures of the two banks, which stated that both “were slow to mitigate the problems the regulators identified, and regulators did not escalate supervisory actions in time to prevent the failures.”

The GAO further noted its longstanding worry that “supervisory concerns” within an agency are not escalated to more senior officials who might take actions.

Potential Impact on Credit Unions

Credit unions are not regulated by any of the three agencies. They are solely regulated by the NCUA, which has emphasized that it is well-equipped to supervise credit unions and is prepared to react to issues facing the overall banking system.

For instance, in March, agency chairman Todd Harper said, “The NCUA is well positioned to address any issues that may arise from broader market concerns about liquidity in the financial services sector.”

Federal Reserve Report on Silicon Valley

The Fed report was accompanied by a statement from Michael Barr, the agency’s vice chairman for supervision, and a Biden Administration appointee.

“Overall, the supervisory approach at Silicon Valley Bank was too deliberative and focused on the continued accumulation of supporting evidence in a consensus-driven environment,” the report stated, in the first regulator review of causes of the bank’s failure. “Over the same period, supervisory policy placed a greater emphasis on reducing burden on firms, increasing the burden of proof on supervisors, and ensuring that supervisory actions provided firms with appropriate due process.”

Here are some of the key findings from the report and Barr’s statement:

–The Trump Administration’s deregulatory philosophy led to slower action by supervisors and a reluctance to escalate issues.

The report does not name Randal Quarles, who served in Barr’s position during the Trump Administration. However, without naming Quarles, the Fed noted a “shift in culture” to reduce regulatory burden and to meet a higher burden of proof for a supervisory conclusion.

–A bipartisan bill that rolled back some of the Dodd-Frank rules led to a weaker regulatory framework for financial institutions.

“Had these changes not been made to the framework, [Silicon Valley] would have been subject to enhanced liquidity risk management requirements, full standardized liquidity requirements, enhanced capital requirements, company-run stress testing, supervisory stress testing at an earlier date, and tailored resolution planning requirements,” the report reads.

–The run on deposits at Silicon Valley “appears to have been fueled by social media and SVB’s concentrated network of venture capital investors and technology firms that withdrew their deposits in a coordinated manner with unprecedented speed.”

Barr said the Fed needs to ensure that supervision intensifies at the right pace, as a firm grows, and that the agency must reevaluate how it supervises management of interest rate risk and liquidity risk.

He added that oversight of incentives for bank managers needs to improve, noting that Silicon Valley’s managers responded to incentives approved by the board of directors and were not compensated to manage the bank’s risk.

FDIC Report on Signature Bank

While the failure of Silicon Valley Bank contributed to the demise of Signature Bank, the root cause of its failure was poor management, the FDIC said.

“SBNY funded its rapid growth through an overreliance on uninsured deposits without implementing fundamental liquidity risk management practices and controls,” the agency found. “Additionally, SBNY failed to understand the risk of its association with and reliance on crypto industry deposits or its vulnerability to contagion from crypto industry turmoil that occurred in late 2022 and into 2023.”

However, the FDIC also conceded that communication of its examination results to Signature Bank was not always timely.

The report revealed that from 2017 to 2023, the FDIC was not able to adequately staff an examination team dedicated to the bank. This meant that, “Certain targeted reviews were not completed timely or at all because of resource shortages.”

Since 2020, an average of 40% of the large financial institution staff positions in the FDIC’s New York regional office have been either vacant or filled by temporary employees, according to the report.

Political Reaction

House Financial Services Committee Chairman Rep. Patrick McHenry, R-N.C., said the GAO report was timely and independent.

He added, however, that the bulk of the Fed report “appears to be a justification of Democrats’ long-held priorities.”

“Specifically, the section on tailoring is a thinly veiled attempt to validate the Biden Administration and Congressional Democrats’ calls for more regulation,” McHenry said. “Politicizing bank failures does not serve our economy, financial system, or the American people well.”

Senate Banking Chairman Sen. Sherrod Brown, D-Ohio, said that the Fed and FDIC reports clearly demonstrate how poorly the banks were managed.

“It is also clear that supervision fell short here,” he added. “We must address gaps in the Fed and FDIC’s supervisory structure, and we must strengthen the rules weakened by the prior administration.”