Regulators to Publish Postmortems on Silicon Valley Bank, Signature Failures
Summary
- Reports are expected to include recommendations for stricter regulation of regional banks
Washington regulators plan to release postmortems of their oversight of Silicon Valley Bank and Signature Bank before they abruptly collapsed last month, potentially highlighting missteps by both banks’ management and their federal supervisors.
The Federal Reserve is expected to release a report Friday morning digging into its handling of SVB, the culmination of a review led by Michael Barr, the Fed’s vice chair for supervision. A second report, expected later in the day from the Federal Deposit Insurance Corp., will analyze that agency’s oversight of Signature.
Both reports are expected to include recommendations for toughening regulation of regional banks similar in size to SVB and Signature, potentially through more robust liquidity and capital rules and closer supervision. In response to the failures, officials have said they are weighing tougher rules for regional banks with at least $100 billion in assets.
The look-backs come as another firm, San Francisco-based First Republic Bank, faces significant challenges. The bank has lost 95% of its value since early March, and there are no easy options for stemming the crisis.
Regulators took control of Santa Clara, Calif.-based SVB on March 10. The collapse sparked a panic that led to the weekend failure of New York-based Signature Bank and an intervention by financial regulators to protect uninsured depositors at both banks. Officials launched an emergency-lending facility to make more funds available to meet demands for bank withdrawals, an effort to prevent runs on other banks.
Officials soon afterward said they would dig into what went wrong. Mr. Barr told lawmakers last month that the central bank had privately raised concerns with SVB starting more than a year before its collapse. He said regulators had given the lender poor ratings for managing risks, which included long-term securities that lost value as interest rates rose. The firm had a large amount of uninsured deposits that fled quickly as trouble mounted, behavior that surprised officials who generally assumed such accounts were much more stable.
The Fed’s report is expected to include so-called confidential supervisory information on SVB that regulators rarely make public. It could shed more light on how officials missed the risks lurking in plain sight. A rapid rise in assets and deposits was recorded on SVB’s balance sheets, and mounting losses on bondholdings were evident in notes to their financial statements.
“It’s what we tell banks to do," Mr. Barr said of the Fed’s review in remarks to House lawmakers on March 29. “It’s sort of the first thing you have to do to understand risk within your own institution, and that’s why we’re doing it."
Another round of congressional hearings with top bank regulators is planned for mid-May. The House Oversight Committee has said that it plans to investigate the San Francisco Fed, which shared jurisdiction of SVB with the Fed board in Washington. The Fed’s Office of Inspector General has launched its own review, and congressional leaders have requested a separate probe by another federal watchdog, the Government Accountability Office.
Since the March failures, some of the panic about the financial system has quieted. Worries about American banks have centered on other regional lenders that are perceived to be at risk of deposit flight.
First Republic has seen a far worse decline in value compared with some other banks, such as PacWest Bancorp or Western Alliance Bancorp., which are viewed as potentially problematic. An influx of $30 billion in new deposits from 11 of the biggest banks gave First Republic a chance to consider its options. Its stock has dropped to around $6 a share, from a high of about $16 on Monday, after reporting that customers pulled about $100 billion in deposits last month.
FDIC Chairman Martin Gruenberg recently said that banks with large amounts of uninsured deposits face challenges, “particularly in today’s environment where money can flow out of institutions with incredible speed in response to news amplified through social media channels."
Testifying before Congress last month, he said outflows at banks that faced deposit flight had slowed after the federal intervention to backstop SVB’s and Signature’s depositors.
Losses to the government’s deposit insurance fund from protecting deposits at SVB are expected to be roughly $20 billion, while losses tied for Signature will cost the fund about $2.5 billion, Mr. Gruenberg said. The government will charge banks a fee to cover those losses.