US Fed plans broad revamp of bank oversight in wake of SVB collapse

NEW YORK – The Federal Reserve issued a detailed and scathing assessment on Friday of its failure to identify problems and push for fixes at Silicon Valley Bank (SVB) before the US lender’s collapse, and promised tougher supervision and stricter rules for banks.

In what Fed supervision vice-chairman Michael Barr called an “unflinching” review of the US central bank’s supervision of SVB, the Fed said its oversight of the Santa Clara, California-based bank was inadequate and that regulatory standards were too low.

“SVB’s failure demonstrates that there are weaknesses in regulation and supervision that must be addressed,” Mr Barr said, in a letter accompanying a 114-page report supplemented by confidential materials that are typically not made public.

While it was the regional bank’s own mismanagement of basic risks that was at the root of SVB’s downfall, the Fed said, supervisors of SVB 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 report said.

One particularly effective change the Fed could make on supervision 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 also would have bolstered SVB’s resilience, the Fed added. Mr Barr said as a consequence of the failure, the central bank will reexamine how it supervises and regulates liquidity risk, beginning with the risks of uninsured deposits.

Regulators shut SVB on March 10 after customers withdrew US$42 billion (S$56 billion) on the previous day and queued requests for another US$100 billion the following morning.

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.

New York-based Signature Bank failed two days later – the Federal Deposit Insurance Corporation is due to release its review of that collapse later on Friday – and the Fed and other US government authorities moved to head off an emerging crisis of confidence in the banking sector with an emergency funding programme for otherwise healthy banks under sudden pressure, and guarantees on all deposits at the two banks.

Supervision headcount fell

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 realisation that smaller banks are capable not only of causing ructions in the broader financial system but of doing it at such speed has forced a rethink.

“Contagion from the failure of SVB threatened the ability of a broader range of banks to provide financial services and access to credit for individuals, families, and businesses,” Mr Barr said.

“Weaknesses in supervision and regulation must be fixed.”