The US central bank has said it failed to act with “sufficient force and urgency” in its oversight of Silicon Valley Bank, which collapsed last month in the country’s biggest bank failure since 2008.
The conclusion is one of the main findings from the Federal Reserve’s investigation of the episode. The panic it sparked has raised wider concerns about the banking industry. The report comes as another US lender, First Republic, remains in trouble.
US regulators are reported to be working on a rescue for the struggling firm, which was the 14th largest bank in the US at the end of last year.
Michael Barr, the Federal Reserve’s vice chair for supervision, who led the review, said the US central bank would be toughening its rules in response to what it had learned from SVB’s demise.
“Federal Reserve supervisors failed to take forceful enough action,” he said, pointing to regulatory standards that were “too low”, supervision that did not work with urgency, and risks to the wider system posed by troubles at a mid-size bank that Fed policies had missed.
“Following SVB’s failure, we must strengthen the Federal Reserve’s supervision and regulation.”
The report comes just weeks after regulators took over SVB, after its announcement that it needed to raise money prompted customers to panic and withdraw billions of dollars overnight.
The report said the bank was “uniquely vulnerable” to problems due to “widespread managerial weaknesses, a highly concentrated business model, and a reliance on uninsured deposits”.
But it also faulted Fed supervisors for failing to appreciate the increased risks as the bank grew rapidly and for acting too slowly when it did spot issues.
The Fed’s decision to take a looser approach to oversight of small and mid-size banks, a response to a law Congress passed in 2018, was a key part of the problem, according to the report.
“In the interviews for this report, staff repeatedly mentioned changes in expectations and practices, including pressure to reduce burden on firms, meet a higher burden of proof for a supervisory conclusion, and demonstrate due process when considering supervisory actions,” it said.
“There was no formal or specific policy that required this, but staff felt a shift in culture and expectations from internal discussions and observed behavior that changed how supervision was executed.”
Mr Barr was appointed to his role by President Joe Biden in 2022. Many of the changes discussed in the report occurred under his predecessor, appointed by Donald Trump.
The head of the Federal Reserve, chairman Jerome Powell, said he welcomed the “thorough and self-critical report”.
“I agree with and support his recommendations to address our rules and supervisory practices, and I am confident they will lead to a stronger and more resilient banking system,” he said.
