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When state and federal regulators spotted problems at Silicon Valley Bank, they didn't do enough to make sure the bank acted quickly to fix them. That's one of the key takeaways from a report published Monday, May 8, by California's Department of Financial Protection and Innovation, which, among other responsibilities, works with federal regulators to oversee state banks.
Some of that oversight happens in the form of bank "exams," by which government workers go in and investigate a bank's solvency, management and more.
In the case of Silicon Valley Bank, which failed in March, California was sharing oversight with the Federal Reserve Bank of San Francisco. The Fed had "assumed a lead role for many supervisory activities," the report said.
In years leading up to the bank's collapse, California and federal regulators had "identified deficiencies" in the bank's management practices and had taken action in their capacity as bank supervisors related to the bank's "risk management, liquidity, and interest rate risk simulations," the report said. The bank had begun to remediate those issues, but "the regulators did not take adequate measures to ensure SVB did so with enough speed," the report said.
The report outlined steps the Department of Financial Protection and Innovation could take to protect against "future economic destabilization," including:
• Work with federal regulators to come up with better, faster systems for making banks fix problems;
• Prioritize regulation efforts on banks with more assets, and staff up oversight teams if banks grow quickly, as Silicon Valley Bank did;
• Increase scrutiny of uninsured deposits; and
• Tell banks to come up with a better way to handle social media, a key element in the speed of Silicon Valley Bank's bank run.
"The Federal Reserve played the lead role (in overseeing Silicon Valley Bank) and, as we knew, did a negligent job of addressing problems in SVB that it identified," wrote Ross Levine, a banking and finance professor at UC Berkeley's Haas School of Business. There were lots of federal and state regulators focused on Silicon Valley Bank, "and yet they collectively did not understand the magnitude of the interest rate risk even though it was obvious. Each person seemed to do their job within the context of their little inspection box. Yet, collectively, they missed the big, obvious problem staring them all in the face."
State lawmakers will get a chance to ask questions on Wednesday, May 10, when they hold an oversight hearing on Silicon Valley Bank's collapse. Officials from the state Department of Financial Protection and Innovation are expected to give remarks and answer questions.
"I do want to be clear that SVB failed because the bank's leadership failed, and they didn't properly manage the risk," said Tim Grayson, a state assemblymember from Concord and the chair of the assembly's committee on banking and finance.
As for how much responsibility state regulators have for the ultimate demise of the bank, that's something legislators will have to look at during the upcoming hearing, he said.
"My focus now heading into this Wednesday hearing is how to prevent a similar situation from happening again," Grayson said. "And what that really means for me is being able to take a fresh look at bank supervision and whether or not our state regulator has everything that it needs to protect California, at least California's banking system."
The report comes on the heels of the collapse of First Republic, another California bank. First Republic's customers had begun pulling their money out before Silicon Valley Bank failed, and then customers withdrew even more money in the ensuing panic. On May 1, the state department said that it had taken possession of First Republic and handed it over to federal regulators, who subsequently sold it to JP Morgan Chase Bank.
Different banks have different regulators depending on whether the bank has a state charter or a national charter; charters are like a business license for a financial institution. Banks with a state charter, like Silicon Valley Bank and First Republic, are regulated by both California and the federal government. Other banks, including Bank of America or JP Morgan Chase, have national charters and are regulated primarily by the federal government. Banks can choose which charter to seek.
Federal regulators also bear some responsibility in Silicon Valley Bank's collapse, as the Federal Reserve acknowledged in its own extensive post-mortem report recently. The bank's federal supervisors "did not fully appreciate the extent of the bank's vulnerabilities, or take sufficient steps to ensure that the bank fixed its problems quickly enough," wrote Michael Barr, the Fed's vice chair for supervision in a letter accompanying the report.
The Federal Reserve also pointed the finger at Silicon Valley Bank's management and its board. Barr called the failure "a textbook case of mismanagement by the bank. Its senior leadership failed to manage basic interest rate and liquidity risk. Its board of directors failed to oversee senior leadership and hold them accountable."