Fed report on SVB collapse faults bank's managers -- and central bank regulators

[BumRushDaShow]

Last edited Fri Apr 28, 2023, 03:35 PM - Edit history (1)

Source: CNBC

Silicon Valley Bank’s dramatic failure in early March was the product of mismanagement and supervisory missteps, compounded by a dose of social media frenzy, the Federal Reserve concluded in a highly anticipated report released Friday. Michael Barr, the Fed’s vice chair for supervision appointed by President Joe Biden, said in the exhaustive probe of the March 10 collapse of SVB that myriad factors coalesced to bring down what had been the nation’s 17th-largest bank.

Among them were bank executives who committed “textbook” failures in managing interest rate risk, Fed regulators who failed to understand the depth of SVB’s problems and then were too slow to react, and a social media frenzy that may have accelerated the institution’s demise.

Barr called for broad changes in the way regulators approach the nation’s complex and interwoven financial system. “Following Silicon Valley Bank’s failure, we must strengthen the Federal Reserve’s supervision and regulation based on what we have learned,” he said. “As risks in the financial system continue to evolve, we need to continuously evaluate our supervisory and regulatory framework and be humble about our ability to assess and identify new and emerging risks,” Barr added.

A senior Fed official said increased capital and liquidity might have helped SVB survive. Central bank officials likely will turn their attention to cultural changes, noting that risks at SVB were not thoroughly examined. Future changes could see standardized liquidity requirements to a broader range of banks, and tighter supervision of compensation for bank managers.

Read more: https://www.cnbc.com/2023/04/28/fed-report-on-svb-collapse-faults-banks-managers-and-central-bank-regulators.html

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Article updated.

Original article -

Silicon Valley Bank’s dramatic failure in early March was the product of mismanagement and supervisory failures, compounded by a dose of social media frenzy, the Federal Reserve concluded in a highly anticipated report released Friday. Michael S. Barr, the Fed’s vice chair for supervision appointed by President Joe Biden, said in the exhaustive probe of the March 10 collapse of SVB that a myriad of factors coalesced to bring down what had been the nation’s 17th-largest bank.

Among them were bank executives who committed “textbook” failures in managing interest rate risk, Fed regulators who failed to understand the depth of SVB’s problems and then were too slow to react, and a social media frenzy that may have accelerated the institution’s demise. Barr called for changes in the way regulators approach the nation’s complex and interwoven financial system.

“Following Silicon Valley Bank’s failure, we must strengthen the Federal Reserve’s supervision and regulation based on what we have learned,” Barr said. “As risks in the financial system continue to evolve, we need to continuously evaluate our supervisory and regulatory framework and be humble about our ability to assess and identify new and emerging risks,” he added.

In a stunning move that continues to reverberate across the banking system and through financial markets, regulators shuttered SVB following a run on deposits triggered by liquidity concerns. To meet capital requirements, the bank was forced to sell long-dated Treasury notes at a loss incurred as rising interest rates ate into principal value.

[SWBTATTReg]

1. I hope that they do a better job in watching these 'on-the-edge' banking firms, but w/ the cutbacks

in regulations by tRUMP, I don't know. tRUMP screwed up so much stuff. Personally, IMHO, the bank operators knew that interest rates were going to eventually rise someday (been stuck at low levels for what seems like forever). They didn't even from what I understand even have insurance for when the market went against them, that cocky (and it killed their investments).

[Probatim]

2. No mention that SVB lobbied against regulations that would have prevented this?

That they carved themselves out as a "mid-tier" bank to avoid reporting requirements?

As long as the media and the banking system can blame regulators and we can bail the f*ckers out, everything is fantastic, correct?

[BumRushDaShow]

3. I don't know if any of them read the full report yet

The article did regurgitate this -

Senior Fed officials said changes to the Dodd-Frank reforms helped spur the crisis, though they also acknowledge that the SVB case also was a failure of supervision. A change approved in 2018 reduced the stringency of stress testing for banks with less than $250 billion, a category in which SVB fell.

“We need to develop a culture that empowers supervisors to act in the face of uncertainty,” Barr wrote. “In the case of SVB, supervisors delayed action to gather more evidence even as weaknesses were clear and growing. This meant that supervisors did not force SVB to fix its problems, even as those problems worsened.”

The summary is here - https://www.federalreserve.gov/newsevents/pressreleases/bcreg20230428a.htm

The report is here (PDF - it's 118 pages) - https://www.federalreserve.gov/publications/files/svb-review-20230428.pdf

Per the CNBC article, GAO (Government Accountability Office) also issued a report on the same subject - https://www.gao.gov/blog/march-2023-bank-failures-risky-business-strategies-raise-questions-about-federal-oversight

GAO Summary - https://www.gao.gov/products/gao-23-106736

GAO full Preliminary Review report (PDF - 46 pages) - https://www.gao.gov/assets/gao-23-106736.pdf

(sorry to dump that on you )

[Probatim]

4. The 2018 change was the result of SVB's lobbying efforts - wasn't like the FED just said

we should change the rules for "small banks with $100bn to $250bn in deposits."

[BumRushDaShow]

5. It wasn't just them

it was that whole "$50 - $250 billion" capitalization sector. They felt it was too "burdensome". There were attempts to "simplify it" without changing who needs to do them but that would not be enough for the whiners.

Some of the others -

Big Wall Street Banks See Chance to Weaken Post-Crisis Rule


By Emily Flitter, Kenneth P. Vogel and Alan Rappeport

March 4, 2018

(snip)

The Senate bill, sponsored by Mike Crapo, an Idaho Republican, would create a small exemption. As it is currently worded, it would most likely apply to just three banks, all of which take deposits primarily from large asset managers and other banks, rather than Main Street customers, and are known as custody banks.

The three custody banks — Bank of New York Mellon, State Street and Northern Trust — would, when calculating how much capital to hold on their balance sheets, be able to set aside deposits they received from other banks and immediately gave to the Federal Reserve or another central bank for safekeeping.

(snip)

The prospect of a lobbying fight is spooking smaller banks, which have been waiting years for a legislative vehicle that would relax restrictions on them, including requirements that they undergo regular stress tests. The bill’s success hinges on the support of Democrats who may balk at voting for legislation that is seen as helping the industry’s biggest players.

“It’s everyone’s right to lobby for whatever they want to lobby for, but this is a very careful, delicately balanced bill with very solid bipartisan support,” said Paul Merski, the top lobbyist for the Independent Community Bankers of America, a trade association that has pushed hard for the changes central to Mr. Crapo’s bill.

(snip)

https://www.nytimes.com/2018/03/04/business/wall-street-banks-dodd-frank.html

Those that were heavily into crypto started crumbling first (like Signature), although Signature wasn't even at the $50 billion threshold but other bigger banks took a hit with the FTX failure, and that triggered a chain reaction.

The Fed back then didn't want it to change but as you know, the "changes" are congressional and the GOP had a trifecta in 2017 - 2018 (after which Democrats took the House back again).

[Probatim]

6. Thanks for posting that - much better background than my offhand comments on the subject.

The combination of the risk associated with crypto, industries fending off meaningful regulations, and bailouts is a huge risk for an economy to take.

[BumRushDaShow]

7. You're welcome

I remember Elizabeth Warren going ballistic when that was all happening. Ultimately, the result was -

S.2155 - Economic Growth, Regulatory Relief, and Consumer Protection Act

For the Roll Call votes -

There were 16 Democrats and 1 Independent (King) who voted for it (with 1 (D) not voting) - https://www.senate.gov/legislative/LIS/roll_call_votes/vote1152/vote_115_2_00054.htm

There were 33 Democrats in the House that voted for it (with 2 (D)s not voting) - https://clerk.house.gov/Votes/2018216

I know you mention SVB's very "public" push for this but they are also under investigation by both the SEC and DOJ (notably Beck and Becker) for dumping stocks ahead of SVB's meltdown. Hope they get the "Martha Stewart treatment" but we shall see.

[Probatim]

8. You're welcome - and I think your comments about the "Martha Stewart treatment" is a little amusing.

I don't think wealthy white guys get that treatment. Bernie Madoff got that treatment, but only because he screwed other wealthy white guys.

They certainly deserve it though.

[BumRushDaShow]

9. You are exactly right

although one can hope.

[Yo_Mama_Been_Loggin]

10. "But they were woke," James Comer

[IbogaProject]

11. Tighter supervision of [executive] compensation

This is needed for all public companies, plus any private public facing entity over some small size. All executive compensation over say 250K needs to be held in escrow for 15-20 years or at least 5 years. That would better align executives interests w the shareholders and the public.

Future changes could see standardized liquidity requirements to a broader range of banks, and tighter supervision of compensation for bank managers.

[snot]

12. I've got a lot of thoughts about bank regulation,

for anyone interested:

As Elizabeth Warren, Nouriel Roubini and others have pointed out, for over 50 years following the enactment of Glass-Steagall and other reforms following the crash that brought on the Great Depression of the 1930’s, our economy boomed while avoiding busts. Beginning with President Reagan’s deregulation of S&L’s followed by President Clinton's repeal of Glass-Steagall and refusal to regulate credit derivatives, those very effective protections have been dismantled. Some were partially restored after the 2008 crash, only to be weakened again.

At present, the very structures of our financial system have been modified to the point that the worst kinds of speculation and cannibalistic capitalism are incentivized, while genuinely productive enterprises are starved or even targeted for LBO’s that hollow out products and jobs and ultimately destroy the company.

There are now extant several times more credit derivatives – which geometrically multiply the loss from any depreciation in related assets – than there were in 2008. We are teetering on the brink of the biggest financial disaster in human history. (And we can’t money-print our way out of this and other expenses without inflating the dollar into oblivion, together with "the full faith and credit" standing of the US, which would likely impact any replacement CBDC.)

American citizens see what is going on. Some may not understand the details, but we all understand that the game is rigged; we all see that no matter what happens to the banks or corporations, the people who run them walk out vastly wealthier; and we all see how many of our elected representatives are in Wall Street pockets.

I personally have saved for my retirement since I was 16 years old, lost a huge chunk of my life savings in the 2008 crash, got out of the stock market because it had so clearly become a casino in which only the house wins, and so never made back what I lost; and now, rampant inflation is devouring what’s left.

What we’re up against is not just “vulture capitalism” – the extraction of sustenance from enterprises that are already dead – it’s “cannibal capitalism” – preying on and hollowing out living, robust economic enterprises. Or as (Sir Thomas) Gresham’s Law puts it from another angle “Bad money drives out the good."

Measures I believe we should push for as soon as possible include:

In the case of any failed or bailed-out financial institution, claw back ALL senior executive compensation paid by or on behalf of that institution or any of its affiliates or agents for the previous three years.

Repeal the “bail-in” law(s) that make innocent depositors liable for bank losses before bond and stockholders in the bank. Depositors have the LEAST ability to assess the financial status and risks of the banks they select and the least control over what the bank does; it’s both unfair and creates the wrong incentives to subject gandma’s deposits to risks greater than those borne by the bank bond and stockholders.

Restore Glass-Steagall for real (not pretend, as Dodd-Frank did), together with all other financial regulations enacted in the wake of the Great Depression, to their status ca. 1970.

Outlaw all investment in credit derivatives except those necessary in order to hedge an “insurable” business interest (e.g., such as those necessary for an airline to hedge against fuel price increases). (Otherwise, you’re basically allowing people to buy insurance on properties they don’t own – which not only multiplies the losses if any one property “burns down,” but actually creates an incentive for arson!)

Stop bailing out Wall St. banks and other companies; instead, liquidate them and let their including their stock and bond holders eat any losses. If there are concerns about losses to pension funds and other innocent parties, bail those out directly rather than bailing out the failed bank or credit derivative issuer (such as AIG in the 2008 crash).

Investigate and prosecute Wall St. crimes. It is completely unacceptable that Goldman-Sachs got away with betting against the same securities it was selling to pension funds. If that’s not a strict liability crime, it should be.

Restore the regulations subjecting brokers to fiduciary obligations toward their customers.

Prohibit senior management of failed banks from working in other banks – forever.

Outlaw "naked shorts."

Outlaw any CBDC issued by the U.S., the Fed, or any agent or delegee of either. This is a big topic in itself, which I can’t take the time to go into here; but we know that a CBDC would fatally disempower us, and we don’t need or want it.

I realize that one possible objection to the foregoing is that the U.S. may lose financial business if it attempts reforms while other countries continue under rules that are more lax. But in nearly all cases, the banks in those other countries are in even worse shape and the citizens in those countries just as outraged as we are at the bail-outs and the hollowing-out of their real economies. I’m confident that if the situation were properly explained, nearly everyone in the world, other than the bankers and their cronies, would be thrilled to see meaningful regulation of banks and financial markets restored. And this is not a partisan issue: I have yet to meet a Republican (other than those actually employed or funded by Wall St.) who isn’t outraged that there haven’t been more prosecutions of Wall St. executives.