2023-04-28 09:00:15
WASHINGTON — The Federal Reserve is set to release a highly anticipated report on Friday examining what went wrong with its oversight of Silicon Valley Bank, which collapsed in mid-March, in the largest bank failure since the 2008 financial crisis.
The post-mortem comes as the followingshocks of Silicon Valley Bank’s collapse continue to shake the American financial system: First Republic, which required a cash infusion from other large banks as nervous customers pulled their deposits and fled, remains imperiled.
The Fed’s investigation into what went wrong at Silicon Valley Bank has been overseen by Michael S. Barr, the central bank’s head of supervision and one of the architects of the 2010 Dodd-Frank law, which aimed to prevent a repeat of the 2008 crisis. The review was announced on March 13, just following S.V.B.’s failure and the government’s sweeping announcement on March 12 that it would protect the bank’s large depositors, among other measures to shore up the banking system.
That same weekend, the federal government also shuttered a second institution, Signature Bank. The Federal Deposit Insurance Corporation, which was the primary supervisor for Signature, will release its own report Friday.
Still, most of the attention has focused on S.V.B., in part because significant weaknesses at the bank appear to have started and grown progressively worse in plain sight in the years leading up to its demise. The bank had a large share of deposits above the government’s $250,000 insurance limit. That is a potential risk, given that uninsured depositors are more likely to pull their money at the first sign of trouble to prevent losing their savings.
The bank’s leaders also made a big bet on interest rates staying low. That became a problem as the Fed, trying to control rapid inflation, carried out its most aggressive rate increase campaign since the 1980s. The bank held longer-term bonds that dropped in value as interest rates rose, because newer debt issued at the higher rates became more attractive for investors.
Supervisors at the Fed were aware of many of the bank’s problems and had flagged and tried to follow up on some of them. Yet the issues were not resolved quickly enough to save the bank.
The questions that the review might answer center on what went wrong. Was it a problem at the Federal Reserve Bank of San Francisco, which supervised the bank, or did the fault rest with the Federal Reserve Board, which has ultimate responsibility for bank oversight? It is also unclear whether there was an issue with the Fed’s culture around — and approach to — supervision, or whether the existing rules were lacking.
“It’s a little bit of a mystery” what the report will hold, said Steven Kelly, a researcher at the Yale Program on Financial Stability, explaining that he had little expectation that the release would point fingers. “In some sense, they really need a head on a pike — and they’re not going to do that in this report.”
Jeff Hauser, director of the Revolving Door Project, said he was interested to see how the report would deal with the tone around bank supervision at the Fed, and the reality that Gregory Becker, S.V.B.’s chief executive, sat on the board of the Federal Reserve Bank of San Francisco. That role gave Mr. Becker no official influence over bank oversight, but Mr. Hauser thinks that such positions might offer banks the advantage of more prestige.
Mr. Hauser said he also thinks an independent review is needed in addition to the Fed’s internal probe and whatever its inspector general — who is also looking into the matter — eventually releases. Mr. Barr will still have to work with his colleagues in the future, Mr. Hauser pointed out, and the central bank’s inspector general is appointed by the Fed chair.
“We need someone with some independence to dig in,” Mr. Hauser said.
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