Congress Helped Set Stage For Silicon Valley Bank’s Failure, Federal Reserve Says

LOADING ERROR LOADING WASHINGTON ― After the failure of Silicon Valley Bank in March, Senate Banking Committee member Sen. John Kennedy asked on the Senate floor, “Where were the regulators?” On Friday, the regulators responded ― with a reminder that Kennedy and other lawmakers told them to go easy on institutions like Silicon Valley Bank. In a lengthy and highly anticipated report, the Federal Reserve accepted some blame for the bank’s failure, but also noted that thanks to a law Congress passed in 2018, “a shift in the stance of supervisory policy impeded effective supervision by reducing standards, increasing complexity, and promoting a less assertive supervisory approach.” In a preface to the report, the Fed’s top bank supervisor, Michael Barr, said the central bank would consider restoring some of the regulations. In its report Friday, the Fed primarily faulted the bank’s management, which it said “took steps to maintain short-term profits rather than effectively manage the underlying balance sheet risks.” The report also faulted Fed supervisors for being slow to act on known warning signs, such as the bank’s exposure to unrealized losses on its assets due to rising interest rates. If it weren’t for the new law and subsequent regulations, according to the report, Silicon Valley Bank “would have been subject to enhanced liquidity risk management requirements, full standardized liquidity requirements… enhanced capital requirements, company-run stress testing, supervisory stress testing at an earlier date, and tailored resolution planning requirements.” The report also highlighted a culture among supervisory staff, fostered by Quarles, to take it easy on banks. “There was no formal or specific policy that required this, but staff felt a shift in culture and expectations from internal discussions and observed behavior that changed how supervision was executed.” Sen. Elizabeth Warren, the foremost critic in Congress of the 2018 law, said on Twitter that the investigation “identifies how the 2018 law that weakened our bank rules and the Fed’s ‘tailoring’ in response were major contributors to SVB’s failure.” “The Federal Reserve’s report is an unflinching assessment of Silicon Valley Bank’s implosion, demanding the Fed immediately adopt stricter bank oversight and Congress swiftly strengthen bank regulations to prevent another crisis,” Warren said.