Regulators, with prior knowledge of issues at failed banks, missed early opportunities to take action, report asserts

Federal regulators were aware of problems at two large regional banks that failed last month, but they failed to finalize or take substantial action before the banks ultimately met their demise, according to a report issued Friday by the congressional watchdog.

The Government Accountability Office (GAO) said in its report that both the Federal Reserve and the Federal Deposit Insurance Corp. (FDIC) failed to escalate supervisory actions in time to prevent the failures of Silicon Valley Bank (SVB) of Santa Clara, Calif., in the case of the Federal Reserve, and Signature Bank of New York, N.Y., in the case of the FDIC.

The report was one of three issued Friday by federal agencies focusing on the failure of the two banks. The other two were a review by Federal Reserve Board Vice Chair for Supervision Michael Barr of the failure of SVB and a report by the FDIC on the demise of Signature Bank.

Regarding the Federal Reserve, the GAO noted that the Federal Reserve Bank of San Francisco rated SVB as satisfactory up until the bank received its first large bank rating in 2022. “The Reserve Bank downgraded Silicon Valley Bank in June 2022 and began working on an enforcement action in August 2022,” the agency stated. “However, it did not finalize the action before the bank failed.”

As for Signature Bank, the GAO asserted that the FDIC took multiple actions to address supervisory concerns related to Signature Bank’s liquidity and management “but did not substantially downgrade the bank until the day before it failed.”

“GAO has longstanding concerns with escalation of supervisory concerns, having recommended in 2011 that regulators consider adding noncapital triggers to their framework for prompt corrective action (to help give more advanced warning of deteriorating conditions),” the report stated. “The regulators considered noncapital triggers, but have not added them to the framework, thus missing a potential opportunity to take early action to address deteriorating conditions at banks.”

As for covering non-insured deposits at the banks (which made up a substantial portion of the their deposit bases), the report notes that the FDIC and the Federal Reserve Board “assessed that not guaranteeing the uninsured deposits likely would have resulted in more bank runs and negatively affected the broader economy. The Secretary of the Treasury concurred with this assessment and made the determinations,” the report states.

Bank Regulation: Preliminary Review of Agency Actions Related to March 2023 Bank Failures