Illustration: Eniola Odetunde/Axios
The Federal Reserve does more than set monetary policy. It is also the primary regulator of many banks, including those that have failed. Bank of Silicon Valley. Now progressives and the banking industry — unlikely bedfellows for sure — are blaming the Fed for this bank’s epic meltdown.
Why is it important: Calls for tougher regulation usually follow any type of major banking crisis, but the details matter. With the failure of SVB, one question is, was it the existing laws that failed, or a failure in their application? The response, in theory, helps prevent the next crisis.
- We know the immediate cause of SVB’s collapse – a record $42 billion bank run fueled by its highly concentrated depositor base of venture capitalists and startup founders. And we know that losses in the bank’s holdings of long-term bonds, triggered by rapidly rising interest rates, caused the immediate liquidity crunch.
- So why didn’t the bank’s regional supervisors or San Francisco Fed banking examiners catch these risk management issues before they escalated into a crisis?
What they say : One of the Federal Reserve’s main jobs is to supervise banks — and they’ve failed here, says Aaron Klein, a senior researcher at Brookings who worked on financial regulation at the Treasury Department during the Obama administration.
- His comments are no different from those of the Bank Policy Institute, industry advocacy group: ‘SVB’s failure appears to reflect primarily a failure of management and oversight’, rather than a regulatory failure, the group said in a statement. analysis released on Tuesday.
- The San Francisco Fed was the bank’s supervisory regulator. They could and should have looked at SVB’s books and identified the risks, says Saule Omarova, a Cornell law professor whose nomination to head the Office of the Comptroller of the Currency fell through in 2021 — in part because of his opinions on stricter regulations.
- The risks have also been flagged publicly, says Dennis Kelleher, CEO of Better Markets, a nonprofit that advocates for tougher regulation, pointing to a November 2022 WSJ article pointing out the risks for banks from rising interest rates which appointed SVB.
The other side: Relationships with bank examiners are confidential, so we don’t know what goes on behind the scenes.
- Reviewers may not have realized the level of risk involved. Prior to this crisis, uninsured bank deposits were considered only marginally riskier than accounts covered by the Federal Deposit Insurance Corporation. No one had ever seen a bank transaction go viral on Twitter.
In the meantime, until the end of 2021, the Federal Reserve’s vice chairman for oversight, responsible for setting the agenda around oversight, was President Trump’s appointee, Randal Quarles. He was criticized for urging bank examiners take a less confrontational approach.
- Quarles tells Axios that the assessment just isn’t accurate. “It wasn’t friendlier supervision,” he says. “It was regular procedure.” The idea was to be fair.
- Quarles also pushed through regulatory changes that made it easier certain standards. He says these moves wouldn’t have changed the result for SVB.
- In addition, the former CEO of SVB sat until last week on the board of directors of the San Francisco Fed, one of the three leaders representing the banks of the district. (During the financial crisis, the fact that heads of failing banks sat on these boards was a controversial issue.)
State of play: The Federal Reserve said Monday that it conduct an examination how his supervision of the bank was handled. (When contacted by Axios, a Fed spokesperson had no comment beyond that announcement.)
- But critics say an internal investigation might not be enough, especially if past investigations are any indication.
- For example, an internal Fed investigation a few years ago failed to find an insider who leaked information. “The FBI must have found it for them,” Klein notes.
- “The Fed simply cannot credibly conduct a thorough and independent investigation of itself,” Kelleher said in a statement this week.
But, but, but: While it’s easy to point fingers at regulators, both Omarova and Kelleher say the bank’s failure is ultimately the fault of its own executives.
The plot: The rollback of parts of the Dodd-Frank rules that people appreciate is getting more press attention right now. It is. Elizabeth Warren (D-Mass.) blame for what happened.
- This flashback, passed with a bipartisan vote, raised the bar by which banks would be classified as systemically important. Previously, banks with $50 billion or more in assets were eligible; now it’s $250 billion.
- This meant that SVB (which had assets of $209 billion at the end of last year) and banks like it were no longer subject to rigorous stress tests and liquidity requirements – which aim to ensure that banks have at least 30 days of cash or cash equivalents on hand to repay depositors in the event of a shock.
- However, it is unclear whether these requirements would have made a difference for SVB. The Bank Policy Institute claims that SVB would have passed these tests.
The bottom line: Both Omarova and Klein pointed out that the Books Act and how it is implemented are two very different things.