April 28 (Reuters) – U.S. regulators on Friday put large banks on notice that tougher oversight is coming, after the Federal Reserve and Federal Deposit Insurance Corp issued detailed reports on what went wrong and where their supervisors came up short in the run-up to the two biggest bank failures since the Great Financial Crisis.
The Fed’s assessment of its inadequacies in identifying problems and pushing for fixes at Santa Clara, California-based Silicon Valley Bank came with promises for tougher supervision and stricter rules for banks.
“Our first area of focus will be to improve the speed, force, and agility of supervision,” Fed Vice Chair of Supervision Michael Barr said in a letter accompanying a 114-page report supplemented by confidential materials that are typically not made public and which showed deficient management of key bank risks. “Our experience following SVB’s failure demonstrated that it is appropriate to have stronger standards apply to a broader set of firms.”
Shortly after the release of the Fed’s report, the FDIC delivered a 63-page account of its failings in the collapse of Signature Bank, and those of the New York-based firm’s management, to fix persistent weaknesses in liquidity risk management and over-reliance on uninsured deposits. Both SVB and Signature failed last month.
“In retrospect, the FDIC could have acted sooner and more forcefully to compel the bank’s management and its board to address these deficiencies more quickly and more thoroughly,” it said.
Both reports said the banks’ managers were primarily to blame for prioritizing growth and ignoring basic risks that set the stage for the failures.
And while they both identified supervisory lapses – the Fed’s report was particularly scathing – both stopped short of laying the responsibility for the failures at the feet of any specific senior leaders inside their oversight ranks.
‘POOR MANAGEMENT’
At SVB, the Fed said, supervisors did not fully appreciate the problems, delaying their responses to gather more evidence even as weaknesses mounted, and failed to appropriately escalate certain deficiencies when they were identified.
At the time of its failure, SVB had 31 unaddressed citations on its safety and soundness, triple what its peers in the banking sector had, the U.S. central bank’s report said.
Increased capital and liquidity requirements also would have bolstered SVB’s resilience, the Fed added. Barr said as a consequence of the failure, the central bank will reexamine how it supervises and regulates liquidity risk, beginning with the risks of uninsured deposits.
It also said it would look at tying executive compensation to management’s addressing of supervisory weaknesses.
Before the twin failures in March, banking regulators had focused most of their supervisory firepower on the very biggest U.S. banks that were seen as critical to financial stability.
The Fed’s report signaled that it will look to subject banks with more than $100 billion in assets to stricter rules.
Regulators shut SVB on March 10 after customers withdrew $42 billion on the previous day and queued requests for another $100 billion the following morning.
The historic run triggered massive deposit outflows at other regional banks that were seen to have similar weaknesses, including a large proportion of uninsured deposits and big holdings of long-term securities that had lost market value as the Fed raised short-term interest rates.
Signature’s failure, the FDIC said in its report, was caused by “poor management” and a pursuit of “rapid, unrestrained growth” with little regard for risk management.
Just as critically, the FDIC said it did not have enough staff to do the work of supervising the bank.
Since 2020, an average of 40% of positions in the FDIC’s large bank supervisory staff in the New York region were vacant or filled by temporary employees, the report said.
Regulators closed Signature two days after SVB was shuttered. Signature lost 20% of its total deposits in a matter of hours on the day that SVB failed, FDIC Chair Martin Gruenberg has said.
Similar to SVB, Signature examiners reported weak corporate governance practices and failures by bank management to address shortcomings identified by supervisors, including the firm’s reliance on uninsured deposits.
While the fallout from the failures of the two banks has slowed, some firms are still feeling the effects, with San Francisco-based First Republic Bank (FRC.N) struggling for survival after reporting earlier this week that its deposit outflows after the SVB and Signature collapses exceeded $100 billion.
Reporting by Ann Saphir
Editing by Chris Reese
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