Barr Report: AFR's Banking Crisis of '23 Brief
Key points in, and reactions to the Fed report on the failure of Silicon Valley Bank
Summing Up
Coverage of the Barr Report on the failure of Silicon Valley Bank struck pretty much the same tone in all the headlines: “Federal Reserve report blames Silicon Valley Bank execs — and itself — for bank's collapse,” wrote ABC News. The 118-page report has a lot of detail and charts. There are lots of details on management failures. The mea culpism around supervision is strong. The Fed makes clear that regulation is a problem too. And the passage of S.2155 was an important milestone on the road to SVB’s collapse. It is also thin in some crucial respects, notably the role of senior Fed leadership.
Americans for Financial Reform has a new policy memo that outlines steps the Fed can take, without changes to the law, in response to this year’s financial turbulence. It’s time to act.
Law and Regulation Played Key Role – Supervisors Under Bus – Senior Leadership Role? – Independent Review? – Megabank Capital Rules – Political Response – Social Media – Banker Lobby – Banker Hubris – Signature – Punchline
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Law and Regulation Played Key Role.
S.2155 was the key change. “In 2019, following the passage of EGRRCPA, the Federal Reserve revised its framework for supervision and regulation, maintaining the enhanced prudential standards (EPS) applicable to the eight global systemically important banks, known as G-SIBs, but tailoring requirements for other large banks. For Silicon Valley Bank, this resulted in lower supervisory and regulatory requirements, including lower capital and liquidity requirements. While higher supervisory and regulatory requirements may not have prevented the firm’s failure, they would likely have bolstered [SVB’s] resilience.”
Hilary Allen highlights in a tweet: “This jumped right out at me ‘The Board's tailoring approach in response to the EGRRCPA and a shift in the stance of supervisory policy impeded effective supervision by reducing standards, increasing complexity, and promoting a less assertive supervisory approach.’”
Supervisors Under Bus.
To the extent that any single group of people bears the brunt of Barr’s appraisal, it is the Fed’s supervisors and examiners, but it’s clear they weren’t operating in a vacuum: “staff approached supervisory messages, particularly supervisory findings and enforcement actions, with a need to accumulate more evidence than in the past, which contributed to delays and in some cases led staff not to take action.”
Politico reporter Victoria Guida tweets: “One key finding is that the central bank has a culture where examiners shy away from taking forceful enough action to get banks to make important changes in a timely way, a senior Fed official told reporters.” But there are bigger figures lurking behind supervisors.
Senior Fed Leadership
What we learn about senior Fed leadership officials mainly through the impressions of lower-level officials. “[U]nder the direction of the Vice Chair for Supervision, supervisory practices shifted. In the interviews for this report, staff repeatedly mentioned changes in expectations and practices, including pressure to reduce burden on firms,” Barr wrote, emphasis added. Absent is any information about how senior officials actually effected this change — how they created the bad supervisory culture.
Powell rates no mention at all, despite his track record of seeking lighter supervision and support for S.2155. See AFR Fact Sheet, “Powell Owns This Crisis.” The report never mentions Quarles by name, though his title makes several appearances.
Sen. Warren makes clear Powell bears blame: “Those responsible for these failures must be held accountable, including Chair Powell who failed in his responsibility to supervise and regulate banks that posed a systemic risk to our economy.”
The Revolving Door Project notes that “the hierarchical nature of the Fed, and unclear delineation of authority between the Board in DC and the Reserve Banks nationwide, meant that Reserve Bank staff often worked alongside, deferred to, and were supervised by Board staff, who answer to the Governors.”
Independent Review?
Barr said in his statement that the Fed would be open to additional probes: “We welcome external reviews of S.V.B.’s failure, as well as congressional oversight, and we intend to take these into account as we make changes to our framework of bank supervision and regulation.”
Aaron Klein tweets: “If Fed’s internal of SVB is as tough as you can expect from a regulator then case has never been stronger for an external review.” Matt Stoller wryly notes: “According to the Federal Reserve, the Federal Reserve should have been a little more aggressive in regulating banks. But don’t worry, the Federal Reserve is on it!"
Megabank Capital Rules.
The argument by industry lobby Financial Services Forum (blog title: “Large Bank Capital Requirements and Recent Bank Failures – Why One Has Nothing to Do with the Other”) has, happily, fallen in deaf ears at the Fed.
Barr Report: “[T]his experience has emphasized why strong bank capital matters. While the proximate cause of SVB’s failure was a liquidity run, the underlying issue was concern about its solvency.” He adds: “we need to bolster resiliency broadly in the financial system, and not focus solely on specific risk drivers,” and mentions Basel Endgame and his “holistic review” of capital rules. (More on that from AFR here.)
Political Response.
HFSC Chair McHenry doesn’t know what precisely cause the crisis — he promises hearings and oversight — but he already knows the problem was not lax regulation: “While there are areas identified by Vice Chair Barr on which we agree...the bulk of the report appears to be a justification of Democrats’ long-held priorities,” McHenry said in a statement. He called it “a thinly veiled attempt to validate the Biden Administration and Congressional Democrats’ calls for more regulation.”
Senate Banking Chair Brown sees more to work with: “These reports confirm how poorly managed, overconcentrated, and over-reliant on particular industries both of these banks were. It is also clear that supervision fell short here. We must address gaps in the Fed and FDIC’s supervisory structure and we must strengthen the rules weakened by the prior administration,” said Brown.
Warren again: “This report is an unflinching assessment of SVB’s implosion, demanding the Fed immediately adopt stricter bank oversight and Congress swiftly strengthen bank regulations to prevent another crisis. The investigation clearly identifies how the 2018 legislation that weakened our bank rules and the Fed’s ‘tailoring’ in response to that legislation were major contributors to SVB’s failure. The report reveals failures at every level: by SVB's executives and board, bank supervisors, and the Federal Reserve Board itself.”
Social Media.
Barr gave a limited nod to the role of social media in the SVB run, emphasizing in a brief passage that it was not only Twitter: “the combination of social media, a highly networked and concentrated depositor base, and technology may have fundamentally changed the speed of bank runs.”
Fed expert Peter Conti-Brown knocks down a new paper on the subject that’s been getting a lot of attention for various reasons. And remember that before Twitter struck, insiders were already acting to pull their money out.
Banker Lobby.
BPI really wishes the Fed had not indicted S.2155 and regulation in its report, and really, really wishes that the Fed had promised policy changes.
Banker Hubris.
Simon Johnson tweets: “The Fed's report on the failures at #SVB misses the big picture. The bank’s previous ‘success’ fooled executives into thinking that they knew what they were doing. This is a major problem in banking, as well as the wider #TechSector and we’re seeing it time and time again.” As it happens, Johnson is co-author of a forthcoming book, Power and Progress, touching on how elites fail us.
Signature.
FDIC says it was management, with a few caveats: “FDIC could have escalated supervisory actions sooner” and “FDIC experienced resource challenges with examination staff that affected the timeliness and quality” and “FDIC could have been more forward–looking and forceful in its supervision.”
Punchline.
Kate Judge tweets: “I must say the SVB report makes it a lot harder for anyone to take any comfort in regulators’ assertions regarding the health of other banks.” Why? CNBC is reporting that FDIC receivership for First Republic is likely.