Delays in supervisory action ahead of the Silicon Valley Bank failure were not caused by regulatory tailoring mandates, despite an earlier Federal Reserve report alleging they were, Vice Chair for Supervision Michelle Bowman said today, citing preliminary results from an independent report she recently commissioned. Bowman also said the report found no evidence that social media played a significant role in the bank’s failure.
The Fed in 2023 conducted an internal report that concluded its supervisors did not fully appreciate the extent of the vulnerabilities as SVP grew in size and complexity, and that the bank experienced “a textbook case of mismanagement.” It also suggested that regulatory tailoring mandates passed by Congress may have impeded effective supervision, although its authors acknowledged that “higher supervisory and regulatory requirements may not have prevented the firm’s failure.”
Not long after becoming vice chair of supervision last year, Bowman commissioned Starling Advisory Group to conduct an examination of the circumstances leading to the failure. She shared initial findings from the first of the firm’s reports during a speech today in London.
Fed staff either knew or should have known about SVB’s vulnerabilities as early as 2022, with “a long-standing culture of risk aversion” contributing to the inaction, Bowman said. The regulatory tailoring mandate did not contribute to the delays in supervisory action. Also, there was no evidence that social media contributed to or accelerated the SVB bank run, with most social media chatter happening “after SVB’s failure was inevitable.”
Bowman said the Fed has already taken steps to address some of the shortcomings found in the report, such as directing examiners to prioritize threats that could result in significant harm to the financial condition of a bank or U.S. financial stability, “instead of focusing excessively on procedural or documentation footfalls.”
“In addition, we are addressing the culture problem head on,” Bowman said. “The review revealed that too many staff members feel it is personally safer to take no action than to risk taking the wrong action. Going forward, examination teams will submit monthly reports directly to the heads of supervision and their respective Reserve Banks. These reports will identify any supervisory issue or concern in which an examiner was uncertain — about whether the standard for taking supervisory action was met, or whether such action might be inconsistent with the expectations of [Fed] Board or Reserve Bank leadership.”
