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Could the Fed Have Avoided SVB's Collapse?

Could the Fed Have Avoided SVB's Collapse?

by Starling Insights

Starling Insights Editorial Board

May 09, 2023


Senior officials at the Federal Reserve reportedly discouraged examiners from investigating potential issues at Silicon Valley Bank and other mid-size and small banks, media sources suggest, reflecting a shift in supervisory policy. It is claimed that the Fed prioritized advancing the financial health of banks over their regulatory oversight, potentially putting consumers at risk.

"Not only were the rules weakened, but there was a change in supervision to much lighter supervision, with messaging that fewer issues should be escalated, [and] that examiners should not be as intrusive for this size-class of banks," said Lael Brainard, a former Board member who left the central bank to lead President Joe Biden's National Economic Council.

In March, Michael Barr, the Fed Vice Chair for Supervision, testified that Fed supervisors knew about risks at SVB and had to hand the tools necessary to address them, but failed to act nevertheless. In his recent report on the matter, Barr blamed supervisory policy changes under the previous administration, arguing that these policy shifts "reduced standards.” 

Barr’s predecessor, Randal Quarles, disagreed with Barr’s characterization, contending that supervisors were advised to act in a more transparent manner, with respect to due process. This aimed at clearer supervisory practices, not reduced standards. It seems clear that debate is sure to continue for some time, and that supervisory practices are in for a detailed re-think.

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