US regulators vow stiffer oversight after SVB, Signature supervision failures
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Deposit insurance officials talking to customers outside the headquarters of Silicon Valley Bank in March 2023.
PHOTO: REUTERS
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NEW YORK – United States regulators on Friday put large banks on notice that tougher oversight is coming, after the Federal Reserve and Federal Deposit Insurance Corporation (FDIC) issued detailed reports on what went wrong and where their supervisors came up short in the run-up to the two biggest bank failures since the great financial crisis of 2007 to 2008.
The Fed’s assessment of its inadequacies in identifying problems and pushing for fixes at Santa Clara, California-based Silicon Valley Bank (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 supervision vice-chairman Michael Barr said, in a letter accompanying a 114-page report supplemented by confidential materials that are typically not made public and which showed deficient management of key bank risks.
“Our experience following SVB’s failure demonstrated that it is appropriate to have stronger standards apply to a broader set of firms.”
Shortly after the release of the Fed’s report, the FDIC delivered a 63-page account of its failings in the collapse of Signature Bank, and those of the New York-based company’s management, to fix persistent weaknesses in liquidity risk management and over-reliance on uninsured deposits.
Both SVB and Signature failed in March.
“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 lapses – 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.
‘Poor management’
At SVB, the Fed said, supervisors did not fully appreciate the problems, delaying their responses to gather more evidence even as weaknesses mounted, and failed to appropriately escalate certain deficiencies when 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.
Increased capital and liquidity requirements also would have bolstered SVB’s resilience, the Fed added.
Mr Barr said that as a consequence of the failure, the central bank will re-examine how it supervises and regulates liquidity risk, beginning with the risks of uninsured deposits.
It also said it would look at tying executive compensation to management’s addressing of supervisory weaknesses.
Before the twin failures in March, banking regulators had focused most of their supervisory firepower on the very biggest US banks that were seen as critical to financial stability.
The Fed’s report signalled that it will look to subject banks with more than US$100 billion (S$133 billion) in assets to stricter rules.
US Federal Reserve supervision vice-chairman Michael Barr testifying before lawmakers on the Silicon Valley Bank and Signature Bank failures in March 2023.
REUTERS
Regulators shut SVB on March 10 after customers withdrew US$42 billion
The historic run triggered massive deposit outflows at other regional banks that were seen to have similar weaknesses, including a large proportion of uninsured deposits and big holdings of long-term securities that had lost market value as the Fed raised short-term interest rates.
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.
Just as critically, the FDIC said it did not have enough staff to do the work of supervising the bank.
Since 2020, an average of 40 per cent of positions in the FDIC’s large bank supervisory staff in the New York region have been vacant or filled by temporary employees, the report said.
Regulators closed Signature
Similar to SVB, Signature examiners reported weak corporate governance practices and failures by bank management to address shortcomings identified by supervisors, including the company’s reliance on uninsured deposits.
While the fallout from the failures of the two banks has slowed, some companies are still feeling the effects, with San Francisco-based First Republic Bank struggling for survival
