wKey Takeaways From Regulatory Review of Bank Failures

Keep watch over banks, but try not to alarm anyone.

That is how bank regulators appeared to view their duties in the lead-up to last month’s banking crisis, at the center of which were the failures of Silicon Valley Bank in California and Signature Bank in New York.

For years, federal regulators overseeing Silicon Valley Bank pointed out its many flaws using language whose impact appeared heavily blunted by technical jargon. They identified a slew of problems, but their findings lacked urgency. They gave the bank’s leaders long timelines to fix things, delivered overall safety and soundness ratings at a plodding pace and seemed unwilling to draw big conclusions about the many accumulating problems.

A similar story unfolded in New York, where supervisors in charge of monitoring Signature Bank’s activities slow-walked regulatory reports and failed to spur the bank’s senior leaders to fix problems they had identified.

Here are some takeaways from reviews released on Friday by the Federal Reserve, the Federal Deposit Insurance Corp. and the U.S. Government Accountability Office.

Some of Silicon Valley Bank’s problems were apparent to regulators

Silicon Valley Bank had 31 open supervisory findings — which flag problems or issues at a bank — when it failed in March 2023. That was about three times that of its peers, based on the Fed’s report.

The Fed started working on an enforcement action against Silicon Valley Bank in August 2022, but had not completed it by the time the bank failed eight months later, according to the G.A.O.

Regulatory changes and a ‘shift in culture’ contributed to inaction

Foot-dragging by supervisors was partially blamed on a culture shift in how banks were supervised under Randal K. Quarles, the former vice chair for supervision at the Fed and a Trump nominee. “Staff felt a shift in culture and expectations from internal discussions and observed behavior that changed how supervision was executed,” the report said.

Some problems at the Fed were blamed on regulatory changes passed by Congress and implemented in 2019 by Mr. Quarles.

As S.V.B. grew, the Fed’s oversight shrank

Even as Silicon Valley Bank expanded and amassed bigger risks, resources dedicated to its oversight actually declined, the report said: Scheduled hours dedicated to the firm’s supervision fell over 40 percent from 2017 to 2020.

That came as resources dedicated to bank oversight across the Fed system were also limited. From 2016 to 2022, head-count in Fed system’s supervisory staff fell slightly even as banking sector assets grew, the report said.

A similar story played out with Signature Bank and the F.D.I.C.

According to the F.D.I.C., Signature Bank’s leaders “pursued rapid, unrestrained growth” without having sufficient risk management practices and controls in place. It also said that the bank “was not always responsive” to F.D.I.C. recommendations.

The F.D.I.C. said it had difficulty attracting examiners and other regulatory staff to New York, where cost of living is high and the quality of city life has deteriorated since the coronavirus pandemic. An average of 40 percent of the jobs that scrutinize large financial institutions have been vacant or filled by temporary staff since 2020.

F.D.I.C. oversight of Signature Bank was sluggish

The F.D.I.C. only downgraded Signature Bank’s overall regulatory rating the day before it failed. In an accompanying letter, the regulator notified the bank that it was initiating an enforcement action, which Signature’s failure immediately rendered moot, according to the G.A.O.

The F.D.I.C. found it was not forceful enough when telling Signature Bank leaders that they needed to fix big problems regulators had identified with their risk management strategies.

The G.A.O. described the F.D.I.C.’s attempts to get Signature’s management back on track as “inadequate given the bank’s longstanding liquidity and management deficiencies.”

The banking industry may face changes as a result

The Fed is poised to look at its stress tests, which assess the health of banks and their resilience to shocks. It is also set to consider whether gains or losses in banks’ security portfolios should be factored into capital assessments — money banks can tap readily in a crisis — for more firms.

The Fed is also looking into standards for bank leaders’ incentive compensation, according to a summary of the review by Michael Barr, the Fed’s vice chair. Making those guidelines tougher could potentially deter risk-taking.

The Fed is set to reconsider how it polices banks with more than $100 billion in assets, on which rules were previously relaxed.

The G.A.O. reiterated its recommendation from 2011 that bank regulators expand the list of problems that would trigger “prompt corrective action” — remedies implemented faster than was required of Signature or Silicon Valley Bank. Regulators still have not expanded that list, according to the G.A.O.

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