The Federal Reserve doesn't just set monetary policy. It's also the primary regulator for many banks — including the failed Silicon Valley Bank. Now, progressives and the banking industry — unlikely bedfellows to be sure — are blaming the Fed for that bank's epic collapse.
Why it matters: Calls for tighter regulation typically follow any kind of big banking crisis, but details matter. With SVB's failure, one question is, was it the laws on the books that failed, or a lapse in their enforcement? The answer, in theory, helps prevent the next crisis.
- We know the proximate cause of SVB's collapse — a record-breaking $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-duration bonds, triggered by rapidly rising interest rates, caused the immediate cash crunch.
- So why didn't the bank's regional supervisors or bank examiners at the San Francisco Fed catch these risk management issues before they ballooned into crisis?
What they're saying: One of the Federal Reserve's main jobs is overseeing banks — and they failed here, says Aaron Klein, a senior fellow at Brookings who worked on financial regulation at the Treasury Department during the Obama administration.
- His comments aren't dissimilar to those of the Bank Policy Institute, an industry advocacy group: "The failure of SVB appears to reflect primarily a failure of management and supervision," rather than a failure of the regulations on the books, the group said in an analysis released Tuesday.
- The San Francisco Fed was the bank's supervising regulator. They could have and should have looked at SVB's books and identified the risks, says Saule Omarova, a law professor at Cornell, whose nomination to lead the Office of the Comptroller of the Currency fell through in 2021 — partly due to her views on tighter regulation.
- The risks were publicly reported, too, says Dennis Kelleher, CEO of Better Markets, a nonprofit that advocates for tighter regulation, pointing to a November 2022 WSJ article highlighting risks to banks from rising interest rates that named SVB.
The other side: Bank examiner dealings are confidential, so we don't know what was happening behind the scenes.
- Examiners might not have realized the level of risk at play. Previous to this crisis, uninsured bank deposits were viewed as only marginally riskier than accounts covered by the Federal Deposit Insurance Corporation. No one had ever seen a bank run go viral on Twitter.
Meanwhile, until the end of 2021, the vice chair for supervision at the Federal Reserve, responsible for setting the agenda around supervision, was President Trump's appointee Randal Quarles. He’s been criticized for urging bank examiners to take a less adversarial approach.
- Quarles tells Axios that the assessment simply isn't accurate. "It wasn't friendlier supervision," he says. "It was due process." The idea was to be fair.
- Quarles also pushed through regulatory changes that eased certain standards. He says those moves wouldn't have changed the outcome for SVB.
- Separately, SVB's former CEO until last week sat on the board of the San Francisco Fed, one of three executives representing banks in the district. (During the financial crisis, the fact that executives of failed banks sat on these boards was a controversial issue.)
State of play: The Federal Reserve said on Monday that it's conducting a review of how its supervision of the bank was handled. (When contacted by Axios, a Fed spokesperson didn't comment beyond that announcement.)
- But critics say an internal investigation may not be enough — especially if past probes are any indication.
- For example, an internal Fed investigation a few years ago failed to turn up an insider who'd been leaking information. "The FBI had to find it for them," Klein notes.
- "The Fed simply cannot credibly do a thorough and independent investigation of itself," said Kelleher in a statement this week.
But, but, but: While it's easy to point the finger at regulators, Omarova and Kelleher both say the bank's failure is ultimately the fault of its own leaders.
The intrigue: Getting more attention in the press right now is the Trump-era rollback of certain portions of Dodd-Frank rules that folks like Sen. Elizabeth Warren (D-Mass.) blame for what happened.
- That rollback, passed with a bipartisan vote, raised the bar on which banks would be categorized as systemically important. Previously, banks with $50 billion or more in assets qualified; now it's $250 billion.
- That meant SVB (which had assets of $209 billion at the end of last year) and banks like it were no longer subject to stringent stress tests and liquidity requirements — which are meant to ensure banks have at least 30 days of cash or cash-equivalents on hand to pay back depositors in case there's some kind of shock.
- However, it's not clear if those requirements would have made any difference for SVB. The Bank Policy Institute says SVB would've passed these tests.
The bottom line: Omarova and Klein both pointed out that the law on the books and how it's implemented are two very different things.
