SVB, Signature Failures Drive Calls for Urgent Bank Supervision

A lack of ‘urgency’ among federal banking supervisors to fix shortcomings at Silicon Valley Bank and Signature Bank emerged as a common theme in sweeping government reports on the banks’ failures.

But as regulators weigh how to act more decisively to avert future bank collapses, there may not be an easy fix.

Reports released Friday by the Federal Reserve and Federal Deposit Insurance Corp. on the March failures of SVB and Signature, and a new Government Accountability Office report on the banks’ collapses, all highlight how problems flagged by federal supervisors on everything from interest rate risks to uninsured deposits would linger, sometimes for years, without being fully addressed.

“We need to develop a culture that empowers supervisors to act in the face of uncertainty,” Fed Vice Chair for Supervision Michael Barr said in a letter accompanying the central bank’s report, an effort he led.

Likewise, the FDIC and GAO said regulators should consider ways to move more aggressively to ensure problems are addressed at the institutions they monitor.

The agencies’ reports were followed over the weekend by the failure of another financial institution, First Republic Bank, which was acquired by JPMorgan Chase & Co. in a loss-sharing deal with the FDIC.

Getting bank supervisors to act quickly is likely to prove tricky, said Mayra Rodríguez Valladares, the managing partner of consultancy MRV Associates and a former New York Fed staffer.

The supervisory process takes time, and examiners deployed by state and federal banking regulators often don’t have the incentive to push for rapid changes at the banks they oversee. In some cases, examiners can be punished for being too aggressive, she said.

A former Federal Reserve Bank of New York examiner, Carmen Segarra, claimed she was fired for failing to water down concerns related to a giant global bank in a 2014 lawsuit, which was eventually dismissed.

“What Barr is saying is aspirational, it’s fabulous. But I want to know how he’s going to change the culture,” Rodríguez Valladares said.

Failed Exams

For banks the size of SVB, which had $209 billion in assets and $175.4 billion in deposits when it was seized by the FDIC, and Signature, with $110.4 billion in assets and $88.6 billion in deposits, bank examiners typically do a full review every 12 to 18 months. They have the power to review books and records and spot risks in banks that need to be addressed.

Examiners can issue what are known as “matters requiring attention,” or the more serious “matters requiring immediate attention,” to get a bank to address its problems. If changes aren’t made, banks can face downgrades on their CAMELS ratings—a key measure of a bank’s capital, asset quality, management capability, earnings liquidity, and sensitivity to market risks—or enforcement actions.

In the case of both SVB and Signature, supervisors repeatedly called for changes to bank operations in a host of areas that weren’t heeded for years.

The Fed and the FDIC provided different explanations in their postmortem reports.

The Fed cited communication hiccups between the San Francisco Fed and the Board of Governors in Washington; complications in changing SVB’s classification to one requiring tougher supervision as its deposits grew rapidly; and instructions from the Fed’s Trump-era leadership to collect more data and get consensus before bringing an enforcement action.

In one instance, the Fed noted that supervisors began working on a memorandum of understanding for SVB requiring changes to bank operations in August 2022, but the agreement wasn’t finished before the bank failed in March. The bank had a total of 31 open supervisory findings at the time it collapsed, according to the Fed’s report.

The FDIC cited a significant manpower shortage in its New York Regional Office, while conceding that certain matters should’ve been taken care of sooner.

Examiners should consider “escalating” concerns to enforcement actions if they see recurring issues year after year, Marshall Gentry, the FDIC’s Chief Risk Officer who led the review, said on a call with reporters Friday.

Tone at the Top

Rodríguez Valladares said the problems with supervision at SVB and Signature aren’t a surprise. Similar concerns were raised after the 2008 financial crisis, and the GAO released a report in 2015 calling for swifter action on matters requiring attention.

But what happened with SVB was noteworthy, in part because leadership at the Fed during the Trump years reined in examiners, she said.

“They were slower than normal. And that all has to do with the tone at the top,” Rodríguez Valladares said.

For examiners to be more effective, they’re going to need more resources, said Peter Vinella, managing director at consulting firm PVA Toucan International.

“When they go onsite, there’s a lot of data gathering, and a lot of it’s manual,” he said, adding they need better tools along with more staff.

But examiners also need to be empowered to act, even if they haven’t had the chance to gather all relevant data, Barr said in his letter accompanying the Fed report.

“In the case of SVB, supervisors delayed action to gather more evidence even as weaknesses were clear and growing,” Barr wrote.

Shoot First?

Barr’s predecessor, former Fed Vice Chair for Supervision Randal Quarles, said during his tenure that more data and evidence were necessary to make examinations more effective and provide banks with due process.

Some agency watchers echoed the call for more information following Friday’s reports.

While there were clearly some problems with examinations and supervision at SVB and Signature, it still isn’t clear exactly what caused the failures, said Brian Knight, a senior research fellow at George Mason University’s Mercatus Center.

“You worry that where this could go is examiners shooting first and asking questions later” on supervisory issues, especially when the shortcoming “isn’t an obvious threat,” Knight said.