The Federal Reserve Bank of San Francisco has emerged as a political target in the wake of Silicon Valley Bank's failure last week.
Sens. Elizabeth Warren, D-Mass., Tim Scott, R-S.C., and Ted Cruz, R-Texas, are among those who have voiced criticisms of the regional reserve bank, saying it is
"The San Francisco Fed's failure to address SVB's obviously risky structure is frankly shocking," Cruz, the ranking Republican on the Senate Commerce Committee, wrote in a letter to the heads of the reserve bank and Silicon Valley Bank this week. "As you know, one of the central purposes of the Federal Reserve System is to promote the safety and soundness of financial institutions. It employs a team of over 400 economists, including dozens in the supervision and regulation division."
Warren, a frequent critic of the Fed and its reserve banks, sent a letter of her own on Thursday to Fed Chair Jerome Powell, inquiring whether the Board of Governors had examined the supervisory actions of the San Francisco Fed. She also questioned whether Silicon Valley Bank CEO Greg Becker's role as a board member of the reserve bank elicited favorable treatment for the bank.
"In particular, do you believe the conflict of interest posed by former SVB CEO Gregory Becker's role on the Board of Directors may have played a role in the SF Fed's supervision of SVB?" Warren wrote. "Have you acted to limit conflicts of interest like those posed by Mr. Becker's dual role as SVB CEO and SF Fed board member?"
The missives are the latest in a growing list of grievances from politicians about the Fed's regional reserve banks. Concerns about
Yet even some who believe the reserve banks could benefit from some restructuring and enhanced transparency requirements say the critiques about the San Francisco Fed's role in the Silicon Valley Bank failure could be misplaced.
David Zaring, a legal studies professor at the University of Pennsylvania's Wharton School of Business, said while reserve banks implement the Fed's supervisory objectives, they largely follow the lead of the Board of Governors. If there were noticeable differences among regions, Zaring said, banks would likely gravitate toward "lighter touch" districts.
"I've just seen no evidence of that kind of thing," he said. "So, I'm just not sure how much autonomy regional banks have when it comes to supervision questions, even though there's lots of Fed supervisors who are affiliated with the regional bank rather than the Board of Governors."
The San Francisco Fed oversees the Fed's 12th District, which includes Alaska, Arizona, California, Hawaii, Idaho, Nevada, Oregon and Washington State. It is one of the 12 reserve banks that make up the Federal Reserve System.
While the reserve banks play a role as a front-line supervisor for the Fed, the Board of Governors has a heavier hand in supervising larger institutions.
Eight of the largest banks in the country — Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street and Wells Fargo — are overseen by the Large Institution Supervision Coordinating Committee, which is centralized at the Board in Washington, D.C. Banks below that threshold but with more than $100 billion of assets, including Silicon Valley Bank, fall under the Large and Foreign Banking Organization program, a joint effort by the board and reserve banks.
Because of this, the San Francisco Fed's supervision of Silicon Valley Bank and the Board's oversight were one and the same.
The Board has already launched an
As for the questions raised about Becker's potential conflicts of interest, board members — some of whom are appointed by member commercial banks while others are hand picked by the Board in Washington — "have no involvement in matters related to banking supervision, including specific supervisory decisions," according to the Fed's handbook for board member roles and responsibilities.
Still, Zaring said individuals who sit on the boards of reserve banks likely enjoy an advantage in terms of information transmission to and from the Fed. And, if nothing else, he said, the inclusion of bank executives on the boards is fraught with bad optics.
"The Fed needs to stay close to the private sector, and this is one way of doing so, by giving them some say on the reporting and management obligations of the regional banks. In my view, the Fed can easily stay close to the private sector without that kind of weird relationship," he said. "I just don't think it makes sense to think of the Fed as a system of private banks that come together to form the nation's central bank. I don't think that's true, and I don't think that's been true since 1935 when the Banking Act was passed."
The San Francisco Fed and Silicon Valley Bank declined to comment on this article.
