As the dust settles on a pair of reports about last month's failure of Silicon Valley Bank, parties on both sides of the issue are walking away wanting more.
Both the
Backers and detractors alike commended Barr for putting together a comprehensive review that
Kevin Fromer, president and CEO of the Financial Services Forum, a trade group that represents the eight largest banks in the country, took issue with Barr's calls for heightened capital requirements for all large banks in the wake of the failure.
He argued that Barr is using the unique circumstances surrounding Silicon Valley Bank — a fast-growing bank with a distinct business model and distinctively poor risk management capabilities — to justify industrywide changes.
"One should not conflate a liquidity-driven event marked by management failures and supervisory shortcomings with capital adequacy at the largest U.S. banks," Fromer said in a written statement. "The assertion in the introduction that the Fed should focus on large bank capital requirements is disconnected from the report's conclusions."
Similarly, Greg Baer, president and CEO of the lobbying group Bank Policy Institute, pushed back against Barr's assessment that regulatory changes ushered in by the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, also known as S. 2155, played a role in the bank's failure.
Instead, Baer said, the issue was that Fed supervisors — from both the Board of Governors in Washington and the Federal Reserve Bank of San Francisco — failed to act on clear signs that the bank was in trouble, including the fact that it failed its own internal stress tests and that it had insufficient hedges on its interest rate risk exposures.
"Put simply, there is no provision of S. 2155 that requires examiners to misjudge interest rate risk," Baer said in a written statement, "the examination materials make clear that nothing in S. 2155 prevented them from properly examining it."
Meanwhile, Baer took a positive view of the congressionally requested GAO report, which hung more blame on the San Francisco Fed's "lack of urgency" around addressing issues at Silicon Valley Bank. He called it "accurate and objective."
Rob Nichols, president and CEO of the American Bankers Association, took a less hard-lined stance against the Fed. He applauded the focus of both the GAO report and the Barr report on the failure of bank supervisors to use the tools at their disposal, as well as the acknowledgment of both assessments that Silicon Valley Bank itself was a unique circumstance.
Yet, Nichols also cautioned against using either report to justify sweeping changes.
"We take any bank failure seriously, and we will review the findings and proposed policy changes in these reports carefully, including where the conclusions may differ," he said in a written statement. "At the same time, we urge policymakers to refrain from pushing forward new and unrelated regulatory requirements that could limit the availability of credit and the ability of banks of all sizes to meet the needs of their customers and communities when these reports suggest that existing rules were sufficient."
Dennis Kelleher, head of the consumer advocacy group Better Markets, took issue with the assertion by the banking organizations that certain policy changes enacted by Congress and the Fed in 2018 and 2019 played no role in Silicon Valley Bank's failure. While no one change would have staved off the
Kelleher commended Barr for holding the Fed accountable for its supervisory failings, but said the vice chair could have done more. Specifically, Kelleher said he would have liked Barr to have hung the blame on individuals at the Fed who oversaw the shift toward lighter touch regulation and supervision in 2019, namely Fed Chair Jerome Powell and then-vice chair for supervision Randal Quarles.
"Chairman Jay Powell was not a bystander to Randy Quarles's deregulation, he was a cheerleader of Randy Quarles's deregulation and, in fact, Chair Powell proposed deregulation before Randy Quarles even got to the Fed," Kelleher said. "The public would have been served and it would have enabled greater accountability if the report more appropriately identified, in detail, the actions taken by Chair Powell and others in the years of deregulation and under supervision during the Trump years."
Kelleher was not the only regulation advocate to say Quarles should have been called out by name.
Alexa Philo, a senior policy analyst for banking at American for Financial Reform and a former examiner for the Federal Reserve Bank of New York, said Barr's report was "notably light" on the role changes by current and past Fed leaders contributed to the situation at Silicon Valley Bank.
"Powell supported a light-touch approach to banking regulation and supervision before he even became chair, and Quarles handled these matters directly," Philo said. "Yet the report gives us only vague impressions of lower-level officials about leadership, not concrete evidence."
Despite not being cited in the report by name, the repeated reference to changes orchestrated on his watch were enough to elicit a response from Quarles, who left the Board of Governors in December 2021.
In a statement released Friday, Quarles questioned how the report could conclude that a "shift in the stance of supervisory policy" inhibited the Fed's supervision of Silicon Valley Bank while also acknowledging that "no policy" led to the change. Instead, the report cites a perceived shift in expectations, which Quarles said fails to support the report's ultimate verdict.
"I have the highest respect for the staff of the Fed– they are the cream of the federal civil service. Much of today's report reflects that tradition," he wrote. "I am disappointed that the conclusion on supervisory policy does not meet that high standard."
Several banking experts picked out one specific sentence in the cover letter of Barr's report that seemed to stand out, striking precisely the wrong chord.
Barr wrote: "Today, for example, the Federal Reserve generally does not require additional capital or liquidity beyond regulatory requirements for a firm with inadequate capital planning, liquidity risk management, or governance and controls."
"That's an amazing statement because that's exactly what they're supposed to be doing," said Joe Lynyak, a partner at the law firm Dorsey & Whitney, who called the report "surprisingly candid."
"What they are admitting is they just didn't do their jobs with the authority they have," he added. "It's almost as if everybody failed bank supervision 101."
Lynyak and others said that in past cycles, excessive growth has always been a warning sign that the Fed would monitor closely.
He also faulted the 90-page report for using the words "due process," four times, in referring to the shift in supervision during the Trump administration. The report said that under Quarles, "supervisory policy placed a greater emphasis on reducing burden on firms, increasing the burden of proof on supervisors, and ensuring that supervisory actions provided firms with appropriate due process."
Lynyak said he was astonished that the Fed said they were concerned about giving due process to the banks.
"Are you guys kidding me? There is no due process to the banks," he said. "You toe the line and you do an enforcement order against [SVB] to make them do it."
Ken Thomas, founder and CEO of Community Development Fund Advisors in Miami, faulted the Fed's internal review, calling oversight of Silicon Valley Bank "a textbook case of mismanagement — not by the bank — but by the Fed."
He also faulted Barr's report for not addressing the fact that the Fed gave Silicon Valley Bank a "stamp of approval," on its risk management procedures in 2021 when it bought Boston Private Financial Holdings. Silicon Valley Bank's risk mismanagement issues should have been apparent to the Fed two years ago when deposits ballooned to $148 billion in the first half of 2021, from $103 billion at year-end 2020. Deposits continued to skyrocket in the second half of 2021 to $191 billion, he said.
"I put this whole thing on Jay Powell, because he gave Silicon Valley Bank a glowing stamp of approval on risk management in June 2021, so why should SVB's board think management wasn't doing a good job?" said Thomas. "If I was on the board of SVB and I knew nothing about banking, as most of them did not, why would I be concerned? Because Jay Powell said it was all right. That is the most important thing that is not mentioned in the report."
