In a blog post published earlier this week, Michael Clements, Director of Financial Markets and Community Investment at the US Government Accountability Office (GAO), argues that regulators failed to act upon clear signs in the lead-up to the 2023 bank failures and explains what they may do to prevent similar failures going forward.
"Years before the actual failures, there were signs that Silicon Valley Bank and Signature Bank weren't doing well," Clements writes. "As early as 2019, federal regulators identified risky practices at the banks." Both banks, regulators were aware, had experienced rapid growth and relied upon less stable funding sources. Regulators also saw that the banks had ineffective risk management systems, Clements recounts.
"But while federal regulators saw these signs, we found that their actions either came too late or didn't work," he explains. The Fed voiced concern about vulnerabilities at SVB in 2021 and took enforcement action in 2022. However, it was not able to drive any meaningful change prior to the bank's collapse in 2023. And the FDIC, despite identifying problems at Signature Bank in 2022, did not initiate any related enforcement action until the day before the bank failed.
"While federal regulators are tracking some signs of risky behaviors, their efforts could be improved to limit bank failures," Clements argues. "And there are also additional warning signs they could track." The GAO has made a number of recommendations by which regulators could improve their ability to recognize and act upon key vulnerabilities:
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