The Federal Reserve faces allegations of complacency in the collapse of Silicon Valley Bank (SVB).
Key Details
- The San Francisco Federal Reserve is taking criticism for allowing the second-largest bank collapse in history to happen under its watch, following several supervisor turnovers that focused the Fed’s attention on internal issues and diverted attention from oversight, Bloomberg reports.
- The Fed is in the process of an ongoing internal review that is scheduled to be released in May, and blame is being pointed at the local Fed office to the Board of Governors.
- SVB CEO Greg Becker was a board member of the San Francisco Fed but had no role in supervisory decisions.
Why It’s News
The Federal Reserve has done a great deal in the three weeks since the collapse of SVB, promising to bail out depositors of the influential Silicon Valley institution. However, as Bloomberg notes, these problems were not new. The San Francisco Fed were aware of warning signs at SVB more than a year prior to the collapse and had internally raised concerns of interest rate hikes harming the company, issuing warnings to the bank.
The San Francisco Fed has faced numerous staffing changes, including economist Mary C. Daly becoming the new bank president in 2018 and the retirement of the Head of Supervision Tracy Basinger in 2021, being replaced by Head of Audit Azher Abbasi. Daly’s focus allegedly shifted the Fed’s focus toward improving the company culture.
SVB’s fall reflects poorly on the Fed and casts doubt on its ability to regulate banks under its direct supervision. “There was a significant supervisory failure,” says former Fed governor Dan Tarullo. The Fed may need to reevaluate its internal standards to avoid further crises.
Notable Quotes
“The real question here is: how come the supervisors didn’t pick up on the fact that SVB had gamed the rules to take on a lot of interest-rate risk without holding an adequate amount of capital against it? It’s a pretty obvious maneuver and not a novel one—you would think any seasoned supervisor looking at the balance sheet could pick up on this quickly,” says Columbia University Assistant Professor Lev Menand.
“It looks to me like the regulators knew the problem, but nobody dropped the hammer … Do supervisors have the tools to mitigate threats to safety and soundness? Do the culture, policies, and practices of the board and reserve banks support supervisors in effectively using these tools?” says Senator Jon Tester (D-MT).
