Federal Reserve review blames SVB failure on Donald Trump-era rule changes

Silicon Valley Bank’s failure last month stemmed from weakened regulations under the Trump administration and missteps by internal regulators who were too slow to correct management mistakes, the U.S. central bank said in a scathing review of the lender’s implosion.

The long-awaited report, released Friday, had harsh words for the California bank’s management, but also laid the blame squarely on changes stemming from bipartisan legislation in 2018 that eased restrictions and oversight for all but the biggest lenders.

SVB would have been subject to stricter standards and more intense scrutiny had it not been for attempts to scale back or “tailor”[ads1]; the rules in 2019 under Randal Quarles, the Fed’s former deputy chairman for supervision, according to the central bank.

That ultimately undermined supervisors’ ability to do their jobs, the Fed said.

“Regulatory standards for SVB were too low, supervision of SVB did not operate with sufficient vigor and urgency, and contagion from the firm’s failure produced systemic consequences that were not contemplated by the Federal Reserve’s tailored framework,” Michael Barr, the Fed’s deputy chairman for supervision who led the postmortem, said in a letter Friday.

More specifically, the Trump-era changes that led to a “shift in attitude toward supervisory policy hindered effective supervision by reducing standards, increasing complexity and promoting a less assertive supervisory approach,” he said.

According to documents released alongside the report, SVB’s supervision already found in 2017 that rapid growth and high employee turnover in the bank had “put a strain on” compliance and risk experts’ ability to challenge senior management and “effectively identify and monitor key risks”.

In 2021, regulators issued six citations requiring the bank to fix deficiencies in the way it handled itself and its exposure to adverse shocks. But SVB did not fully address the problems, which led to the supervisory authorities assessing the management as deficient.

Around that time, SVB’s rapid growth had moved it from one supervisory category to another, a transition the Fed said “complicated” the process. Had the bank received a more “thorough evaluation” before it entered the Fed’s so-called Large and Foreign Banking Organization portfolio, risks would have been identified earlier, the report says.

Last autumn, the supervisory authorities determined that the bank’s “interest rate risk simulations are not reliable and require improvements”. Still, they failed to classify the issue as urgent and gave management until June 2023 to resolve it.

“The Federal Reserve did not appreciate the seriousness of critical deficiencies in the company’s governance, liquidity and interest rate risk management,” the review said.

Part of the problem was “a shift in culture and expectations” under Quarles, the Fed found. Citing interviews with staff, supervisors reported “pressure to reduce [the] burden on firms, meet a higher burden of proof for a supervisory conclusion, and demonstrate due process when considering supervisory actions”.

Quarles on Friday pushed back on the Fed’s assessment, saying it did not provide evidence that changing supervisory expectations actually hindered how SVB was handled.

He also said the Fed failed to recognize “very specific and detailed supervisory instructions” in place since 2010 that provided a framework for how to manage the very risks that plagued SVB.

The Fed’s report identified the San Francisco Reserve Bank as the institution ultimately responsible for evaluating SVB, but acknowledged that the Fed’s Washington board both “establishes the regulations . . . and designs the programs used to supervise firms”. It found no evidence of “unethical conduct on the part of supervisors”.

The Fed’s review also highlighted the role of technological change in SVB’s rapid collapse. “The combination of social media, a highly networked and concentrated depositor base and technology may have fundamentally changed the speed of bank runs,” Barr said.

The review is the first official report on SVB’s failure. Lawmakers have accused regulators of failing to use the tools at their disposal and to act quickly to fix the problems once they were identified, with one leading Republican accusing the government of being “asleep at the wheel”.

In a separate independent report also released on Friday, the US Government Accountability Office concluded that the Fed’s supervisory actions were “inadequate given the bank’s known liquidity and management deficiencies”. It singled out the San Francisco department for failing to recommend the issuance of a “simple enforcement action” despite problems it described as “serious.”

Another report by the Federal Deposit Insurance Corporation on Friday examined the causes of the collapse of Signature Bank, which failed in early March just days after SVB. The review places most of the blame on Signature’s executives, but also said the FDIC should have been faster and more thorough in addressing problems at the bank, which were flagged by examiners as early as 2018.

Political divisions have emerged over whether regulatory changes are needed, with the Biden administration calling for a reversal of Trump-era rules and stronger liquidity and capital requirements for banks with $100 billion to $250 billion in assets. Republicans have mostly said new legislation was unnecessary.

Barr on Friday signaled his support for stronger oversight and regulation for banks with more than $100 billion in assets, changes that would not require congressional approval.

He favored rolling back some of the 2019 changes, particularly one that allowed mid-sized banks to exclude unrealized losses in their securities portfolios from their capital accounts. Barr also wanted a new regulatory regime to track banks that were growing quickly or focused on unique industries, as SVB was.

He also argued that SVB’s pay plan did not focus enough on risk, so the regulator should consider setting “tougher minimum standards” for executive pay.

Fed Chair Jay Powell backed Barr’s recommendations, saying he was “confident they will lead to a stronger and more resilient banking system”.

But Elizabeth Warren, the progressive Democratic US senator from Massachusetts, said in a statement on Friday that Powell had to be “held accountable”, having “failed his responsibility to oversee and regulate banks that pose a systemic risk to our economy”.