Fed's Daly: Supervisory 'slowness' led to Silicon Valley Bank failure

Haiyun Jiang/Bloomberg

Federal Reserve Bank of San Francisco president Mary Daly admits that while bank supervisors in her district share some blame for failing to detect weakness in Silicon Valley Bank ahead of its failure in March, any response should focus on the Fed system as a whole. 

The reason is that bank supervision as a practice is directed by the Fed's Board of Governors in Washington rather than by the regional banks, Daly said. 

"Supervision in the Fed is a system effort, and while many of us do not own the decisions — those rest solely with the Board of Governors and Michael Barr, the vice chair [for supervision] — we all own the outcomes," said Daly, speaking at an event at the Brookings Institution Monday morning. "So when the outcomes aren't what we want them to be, we all work collectively to make them better going forward."

Daly went on to say that a top-down approach to bank supervision and regulation exists by design to ensure that banks in different regions of the country can expect uniform supervisory practices no matter where they are headquartered. 

"This is a feature of the [Federal Reserve] system that's built in to get continuity, and it's also because Congress gave the Board of Governors the responsibility of supervising and regulating banks, not the Reserve Banks," Daly said.

The San Francisco Fed has been under fire in recent months as the regional bank whose supervisory experts were charged with monitoring Silicon Valley Bank — the second-largest bank failure in American history. This set off a broad reckoning in policy circles about the safety of the banking sector and regulators' ability to detect and correct shortcomings. 

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Daly said that one conclusion highlighted in Barr's April post-mortem report on Silicon Valley Bank's failure was an overly deliberative process that discouraged supervisors from taking action against banks without total certainty that such actions are warranted. Making bank supervision more proactive is an important way that it could be improved across the Fed system, she said. 

"There's a slowness from when things are spotted and when enforcement actions or other things are taken. That pipeline is not very speedy at any juncture," Daly said. "That's not just a San Francisco thing or a Board of Governors thing; that is a way you can improve the supervisory process. The bias has to be to raise issues as opposed to waiting until you have every shred of evidence, so that's a lesson." 

Daly went on to say that, conversely, the banking crisis demonstrated that financial regulatory apparatus can be very proactive when it needs to be, as evidenced by the response to Silicon Valley Bank and Signature Bank's failures in the same weekend and the development of liquidity facilities for vulnerable banks to use to shore up their balance sheets.

"Look at the agility with which the Fed [and] the FDIC — backed by Treasury — acted after Silicon Valley Bank and Signature Bank failed," Daly said. "It was a weekend, and we have a new facility opened, we have any banks caught up in any spillovers getting the liquidity they needed — that's a rapidity that is obvious. So the question is how do we bring that same sense of … agility to our everyday work so we continue to do things as well and as studiously and as carefully as we're used to, and we still can move agilely through them so that we don't end up with a finding of 'it's too deliberative.' "

Daly also responded to criticism that the San Francisco Fed was not sufficiently skeptical of Silicon Valley Bank's balance sheet because its president, Greg Becker, also served on the Regional Bank's board of directors. 

Supervisory issues are not discussed at the regional bank level, Daly said, and thus there is not and has never been a conflict of interest between the regulators and the banks they supervise. 

"Supervision and the board of directors are completely separate from one another," Daly said. "Those issues are never, ever discussed at the board of directors meetings. We never talk about supervisory issues at board meetings, we never talk about bank supervision at board meetings. We focus on the economy writ large and aspects of running the bank more generally."