The Federal Reserve will make public the findings of its review of the supervision and regulation of Silicon Valley Bank (SVB) prior to its failure, including supervisory information, by May 1, the Fed’s top supervision official will tell lawmakers Tuesday.
According to remarks before a Senate committee released Monday, the official will also say it is important to move forward on key regulatory measures to help further guard against contagion in the banking system from the troubles of a single large institution.
The remarks of Michael Barr, the Federal Reserve’s vice chairman for supervision, told the Senate Banking Committee Monday that the information to be included with the SVB report will include supervisory assessments and exam material. (A footnote to his testimony states that the Fed typically does not disclose such information. “We are sharing confidential supervisory information in the case of SVB because the bank went into resolution, and its disorderly failure posed systemic risk,” it states.)
While the review is still underway, Barr’s comments reiterate that SVB failed “because the bank’s management did not effectively manage its interest rate and liquidity risk, and the bank then suffered a devastating and unexpected run by its uninsured depositors in a period of less than 24 hours.” He will say the Fed is taking an “unflinching” look at conditions in the lead-up to SVB’s failure and that this review “will be thorough and transparent.”
Further into his remarks, Barr will say the Fed is focusing (among other things) on whether the Fed’s supervision was appropriate for the rapid growth and vulnerabilities of the bank. “While the Federal Reserve’s framework focuses on size thresholds, size is not always a good proxy for risk, particularly when a bank has a non-traditional business model,” he will say.
He will also remind of the Fed’s recent decision to establish a dedicated novel activity supervisory group. He will say this group, with a team of experts focused on risks of novel activities, “should help improve oversight of banks like SVB in the future.”
Barr will also look to potential regulatory changes to come, according to the remarks.
“For example, it is critical that we propose and implement the Basel III endgame reforms, which will better reflect trading and operational risks in our measure of banks’ capital needs,” Barr will say. “In addition, following on our prior advance notice of proposed rulemaking, we plan to propose a long-term debt requirement for large banks that are not G-SIBs [global systemically important banks], so that they have a cushion of loss-absorbing resources to support their stabilization and allow for resolution in a manner that does not pose systemic risk.”
Barr’s remarks say regulators will need to enhance stress testing, “with multiple scenarios so that it captures a wider range of risk and uncovers channels for contagion, like those we saw in the recent series of events.” They say regulators must also explore changes to rules on liquidity and other reforms “to improve the resiliency of the financial system.”
In November, Barr testified that the Fed was “taking a holistic look” at the bank capital framework, including the surcharge for G-SIBs, the enhanced supplementary leverage ratio, stress testing, the countercyclical capital buffer, and other measures. These other measures included requirements known as the “Basel III endgame” standards, the final piece of international standards issued after the financial crisis of 2008 which set guidelines for addressing market risk, operational risk, credit risk, and leverage ratios.
The ANPR noted in Barr’s remarks was issued jointly by the Fed, the Federal Deposit Insurance Corp. (FDIC), and the Office of the Comptroller of the Currency (OCC) in October. Regulators sought input on whether an extra layer of loss-absorbing capacity could improve optionality in resolving a large banking organization or its insured depository institution, and the costs and benefits of such a requirement. The agencies said this may, among other things, address financial stability by limiting contagion risk through the reduction in the likelihood of uninsured depositors suffering loss, and keep various resolution options open for the FDIC to resolve a firm in a way that minimizes the long-term risk to financial stability and “preserves optionality.”
Bank Oversight, testimony by Fed Vice Chair for Supervision Michael S. Barr March 28, 2023, before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, Washington, D.C.