A delay in enforcement actions for two failed banks in 2023 by the Federal Reserve may have been caused by the agency’s procedures for moving from a “lower-level concern” to the actions, according to a report issued Wednesday by Congress’s watchdog organization.
The Governmental Accountability Office (GAO), in its report on regulators’ supervision of two large, regional banks before their ultimate failure last spring, noted that both the Fed and the Federal Deposit Insurance Corp. (FDIC) identified “numerous concerns at the banks as early as 2018” but did not issue enforcement actions. The GAO report contends that early actions would have required the banks to fix the problems.
The banks that failed were Silicon Valley Bank (SVB) of Santa Clara, Calif., and Signature Bank of New York, N.Y. Together, the failures cost the FDIC Deposit Insurance Fund (DIF) an estimated $22.5 billion. The GAO also noted that the failures raised questions about the supervisory practices of the Federal Reserve and the FDIC.
The GAO said that, in the five years prior to 2023, both the Fed and the FDIC identified concerns with SVB and Signature Bank. “But both banks were slow to mitigate the problems the regulators identified and regulators did not escalate supervisory actions in time to prevent the failures,” the report states.
According to the GAO, although both regulators established internal procedures for when to escalate concerns to informal or formal enforcement actions, the Fed’s procedures were “often not clear or specific.”
“The procedures often did not include measurable criteria for examiners to use when recommending informal or formal enforcement actions,” the GAO stated in its report. “This lack of specificity could have contributed to delays in taking more forceful action against SVB. Adopting clearer and more specific procedures could promote more timely enforcement action to address deteriorating conditions at banks in the future.”
As for the FDIC, the GAO noted that the agency updated procedures for escalating supervisory concerns to require its examiners to consider an escalation that are repeated or uncorrected at the end of an exam cycle.
“However, although the new guidance would have required examiners to consider escalation of Signature Bank concerns as early as 2019, it does not require escalation,” the GAO wrote. “As a result, it is unclear whether examiners would have escalated concerns to senior management on a timely basis. FDIC officials told us they intend to further update the procedures to expect examiners to require, instead of consider, escalation in these situations.”
The watchdog agency recommended that Congress consider the adoption of noncapital triggers that require early and forceful regulatory actions tied to unsafe banking practices before they impair capital, such as by amending the Federal Deposit Insurance Act (FDIA) to incorporate noncapital triggers.
The agency also recommended that the Fed revise its procedures for escalating supervisory concerns to informal or formal enforcement actions to be clearer and more specific, and to include measurable criteria.
Bank Supervision: More Timely Escalation of Supervisory Action Needed