MNI: Fed's SVB Review Focused on Fixing Regulation Flaws

The Federal Reserve plans to revamp an array of supervisory and regulatory rules after releasing a postmortem of Silicon Valley Bank that collapsed in mid-March, with a focus on empowering supervisors to act more decisively in the face of clear risk management failures.

The review published Friday concludes with blame for SVB's board of directors and management but is also critical of its own supervisors that the Fed says did not appreciate the extent of SVB vulnerabilities and did not take sufficient steps to ensure the bank fixed those problems quickly enough.

Fed Vice Chair for Supervision Michael Barr, who oversaw the report, concludes that weaknesses in supervision and regulation must be fixed and that the central bank needs to develop a culture that incentivizes supervisors to act in a timely way in the face of uncertainty.

At the time of its failure, SVB had 31 unaddressed safe and soundness supervisory warnings, triple the average number of peer banks, the report said.

"We need to bolster resiliency broadly in the financial system, and not focus solely on specific risk drivers," Barr said. "Some steps already in progress include the holistic review of our capital framework; implementation of the Basel III endgame rules; the use of multiple scenarios in stress testing; and a long-term debt rule to improve the resiliency and resolvability of large banks."

(See: MNI INTERVIEW: U.S. Urged to Require Banks To Recapitalize)

CULTURE OF SUPERVISION

After the SVB failure and its post-mortem, the first area of focus will be to improve the speed, force, and agility of supervision, including how to ensure that supervision intensifies at the right pace as a firm grows in size or complexity, a letter authored by Barr said.

"Supervisors should be encouraged to evaluate risks with rigor and consider a range of potential shocks and vulnerabilities, so that they think through the implications of tail events with severe consequences," he said.

The Fed also plans on revisiting the tailoring framework, including to re-evaluate a range of rules for banks with USD100 billion or more in assets and how the central bank supervises and regulates liquidity risk, starting with the risks of uninsured deposits. "A simpler and stronger oversight program and tailoring framework could be both more efficient and more effective," the report said.

"Any adjustments to our liquidity rules would, of course, go through normal notice and comment rulemaking and have appropriate transition rules, and thus would not be effective for several years," Barr said.

The Fed also said it will be re-evaluating capital requirements in light of lessons learned from SVB and said a broader set of firms should take into account unrealized gains or losses on available-for-sale securities. The central bank will also reconsider tailored stress testing and oversight of incentives for bank managers that it says led to a focus on short-term profit over sound risk management. Such regulatory and supervisory changes are not expected to require Congressional action.