‘Weaknesses in regulation…’: Fed plan broad revamp of bank oversight after SVB failure
2 min read . Updated: 28 Apr 2023, 10:23 PM IST
PremiumThe Fed’s vice chair for supervision has announced plans for a broad revamp following the collapse of Silicon Valley Bank, which he blamed on the company’s weak risk management and supervisory foot-dragging by the Fed.
Weeks after the failure of Silicon Valley Bank, the Federal Reserve has now promised tougher supervision and stricter rules for banks. In a detailed and scathing assessment on Friday, the Fed said that its oversight of US lender was inadequate and that regulatory standards were too low.
“SVB's failure demonstrates that there are weaknesses in regulation and supervision that must be addressed," wrote the Fed’s vice chair for supervision in a letter accompanying a lengthy report.
“Contagion from the failure of SVB threatened the ability of a broader range of banks to provide financial services and access to credit for individuals, families, and businesses...We need to develop a culture that empowers supervisors to act in the face of uncertainty," said Michael Barr.
According to the report the Fed's supervision headcount declined by 3% between 2016 and 2022, even as assets in the banking sector grew 37%.
The 102-page report provides fresh insight into the rapid unraveling of SVB and the many factors behin its collapse. It contains detailed accounting of how the Fed let a bank expand its balance sheet by $140 billion in just two years with deficient risk controls. It also shows regulators were aware of most of the bank’s lurking issues, but by the time they took steps toward decisive action, it was too late.
When SVB collapsed on March 10 this year, it had 31 unaddressed “safe and soundness supervisory warnings" - triple the average number for its peers.
“Its senior leadership failed to manage basic interest-rate and liquidity risk. Federal Reserve supervisors failed to take forceful enough action," Barr said in the letter.
The central bank will revisit the range of rules that apply to firms with more than $100 billion in assets, including stress testing and liquidity requirements. Barr also suggested the regulator could require additional capital or liquidity, or limit share buybacks, dividend payments or executive compensation, at firms with inadequate capital planning and risk management.
Barr said the Fed should require a broader set of firms to take into account unrealized gains or losses on available-for-sale securities, “so that a firm’s capital requirements are better aligned with its financial positions and risk."
He also called for changes to improve “the speed, force and agility of supervision," including more continuity in how the Fed oversees banks of different sizes.
While the Fed will seek comment on such proposals soon, any such rules would not take effect for several years.
(With inputs from agencies)