Bank regulators were afforded little time to grapple with disruption from the crypto perimeter of their remit when a boulder was dropped into the very center of their pond. On March 10th, US bank regulators seized control of Silicon Valley Bank (SVB), at the time the nation’s 16th largest lender.1 The largest bank failure since the financial crisis followed ratings agency Moody’s March 7th downgrade of debt issued by SVB Financial Group and its banking subsidiary, Silicon Valley Bank.2 A day later, SVB sold $21 billion in securities, at a loss of some $1.8 billion, to shore up its equity.3
Notably, that same day, the crypto-focused bank Silvergate announced plans to liquidate, a victim of the pressures faced by crypto firms more broadly in the wake of the FTX collapse.4 Spooked depositors pulled $42 billion in deposits from SVB on March 9th alone,5 leading management to scrap a planned share sale, which further damaged confidence in the bank.6 The US government then stepped in, hoping to facilitate a rescue sale, but after failing to find a weekend buyer,7 on Sunday March 12th it announced a guarantee of all deposits held by SVB, without limit,8 to protect the US economy “by strengthening public confidence in our banking system.”9 On March 13th, the bank’s UK arm was sold to HSBC for £1.0010 and the Fed announced an inquiry into SVB’s collapse.11
Recrimination was swift. A 2021 Fed review of SVB had raised red flags. By July 2022, SVB was in a full supervisory review and its governance and controls had been deemed deficient.12 Earlier in the year, SVB management had been warned by BlackRock’s Financial Markets Advisory Group that its risk controls were “substantially below” those of peers.13 So, if both regulators and management were aware of trouble, how was it that the bank was allowed to reach the brink?
“there are weaknesses in regulation and supervision that must be addressed.” - Michael Barr
Some questioned the role of Trump-era policymakers.14 Democrats in the Senate15 and the House16 were quick to call for investigations. Was the bank’s collapse the consequence of negligent management and lax board oversight,17 or was careless supervision to blame?18 Appearing before the Senate Banking Committee, SVB’s disgraced CEO argued that the real culprit was the speed with which unfounded “rumors and misconceptions” circulated across social media channels.19
On April 28th the Fed’s Vice Chair for Supervision, Michael Barr, produced a report detailing his inquiry into the triggering events that led to SVB’s collapse.20 Few were spared condemnation. Barr’s report described SVB’s collapse as “a textbook case of mismanagement by the bank.21 And while “Its board of directors failed to oversee senior leadership and hold them accountable,” the bank’s collapse also demonstrated that “there are weaknesses in regulation and supervision that must be addressed.” More particularly, Barr called out a need to improve the speed, force, and agility of supervision.
The speed with which SVB collapsed was implicated in the collapse of Signature Bank — the third-largest failure in US banking history coming only two days after its second-largest.22 By the end of the first quarter of 2023, jittery customers had pulled $100 billion in deposits from yet another firm, First Republic Bank, which saw 90% of its share value erased.23 On May 1st, with alarm growing in Washington,24 First Republic was seized by regulators who brokered a fire-sale of the bank to JP Morgan.25 Many anticipate further turmoil and additional potential bank failures.26
As legislators, policymakers, regulators, supervisors, boards, and executives grapple with the collapse of SVB, Signature, and First Republic, immediate attention is turned towards the basics of bank risk management: liquidity risk, interest rate risk, credit risk, and capital adequacy. But many have also asked what role culture may have played — both the culture of the banks27 and the prevailing culture among their supervisors.28
“We need to develop a culture that empowers supervisors to act in the face of uncertainty,” the Fed’s Vice Chair for Supervision urged in a letter accompanying his report to Congress.29 Barr wrote that Fed staff had felt “a shift in culture and expectations” under the previous administration, that they had “observed behavior that changed how supervision was executed,” and he argued that this then shaped how supervisors believed they should act. Going forward, Barr said he would emphasize a supervisory culture characterized by a greater “willingness to form judgments that challenge bankers with a precautionary perspective.”
In this connection, Barr noted that supervisors in other jurisdictions had found it helpful to amplify their supervisory capabilities through the adoption of tools “based in behavioral science” that “incorporate data on institutional attitudes and norms.” Such tools might have helped to identify risk oversight blind spots that contributed to the vulnerabilities at SVB, Barr argued. “The Federal Reserve could investigate these tools through a pilot program,” he concluded.
Other Articles in the Comments, Contributions, and Conclusions Series“What is it that distinguishes the thousands of years of history from what we think of as modern times?”
Hidden inexactitudes
“Radical Uncertainty”
"Why did no one see it coming?"
The real trouble with this world of ours
More meaningful metrics
“Too Big to Manage”
Drifting into failure
“Lying to Ourselves”
"We have literally no time even to be astonished."
“We need to develop a culture that empowers supervisors to act in the face of uncertainty.”
“Culture, more than rule books…”
“Proactive identification of threats to trust in banking.”
Blitzkrise
The illusion of control
What is Conduct Risk
“Changing banking for good”
Outcomes oriented
Achieving foresight
Trust matters
Mapping and tapping workplace networks
“An Epidemic of Loneliness”
The fourth wave
System shifts
Conduct: the new prudential risk
The costs of misconduct
Has banking changed for good?
Tribulations, and trials
Audit Quality Indicators
Shared interest and collective action
Nothing ventured…
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