Some crises seem to come out of the blue, while others take place in slow motion. The failure of Silicon Valley Bank (SVB) qualifies for the former, while the failure of First Republic Bank (FRB) would be the later.
It wasn’t a surprise when the FDIC announced that it was seizing and selling the bulk of the institution to JP Morgan Chase, but it capped an intense seven-week period that resulted in shuttering of three mid-sized U.S. banks: SVB, Signature Bank and FRB.
First Republic was the 14th biggest bank in the country and like SVB, had a wealthy customer base that maintained deposits well above the $250,000 FDIC insurance limit.
As problems escalated in March, many of FRB’s depositors fled — according to the company’s Q1 2023 earnings report, $102 billion of deposits left during the first three months of the year, more than half of the $176 billion that was on hand at the end of last year, and far more than the $30 billion of deposits that 11 of the nation’s largest banks injected to help FRB stay afloat. Investors punished the stock over the past two months: on March 8th, FRB was trading at $115 and at the end of trading on its last day of as a public company (April 28), the stock closed at $3.51.
Coincidentally, the failure of FRB occurred just days after the Federal Reserve’s report on what happened at SVB. The 118-page Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank provided a rare look into the opaque and often-shrouded processes that occurs at the nation’s central bank and at its 12 regional banks.
The report may also be instructive as to how bank regulation needs to adapt and change to the current fast-paced exchange of information, which can push an ailing bank towards insolvency in a matter of days.
It echoed what many have said: There was bad management at SVB. However, the more instructive part of the investigation was the acknowledgment that the Fed itself flubbed in its role as supervisor and regulator of the banking system.
According to Michael Barr, the current vice chair of supervision at the Federal Reserve, Fed officials “did not fully appreciate the extent of the vulnerabilities as Silicon Valley Bank grew in size and complexity.” And when spotting problems, “they did not take sufficient steps to ensure that Silicon Valley Bank fixed those problems quickly enough.”
When banks lobbied to ease banking rules, the result was a reduction in supervisory standards, more complexity, and most alarmingly, “a less assertive supervisory approach,” Barr added.
The report calls into question Barr’s predecessor, Randal Quarles’ full-throated defense of “tailoring” banking rules for mid-sized institutions. (The shift in regulation came after the 2018 passage of the Economic Growth, Regulatory Relief, and Consumer Protection Act, which amended the post-financial crisis Dodd-Frank Wall Street Reform and Consumer Protection Act to loosen regulations for small and mid-sized banks.)
The changes to the Fed’s approach to supervision were supposed allow it to “ensure the safety and soundness of the institutions they supervise,” but at the time, then Fed-governor (now Director of President Joe Biden’s National Economic Council) Lael Brainard raised the fear that the shift would “weaken core safeguards against the vulnerabilities that caused so much damage in the crisis.”
The review is the starting point for a reevaluation of banking supervision in the post-SVB era. There will likely be rule changes and equally important will be a refocused effort from top fed officials to individual examiners and supervisors on the ground, who need “to form judgments that challenge bankers with a precautionary perspective.”
Jill Schlesinger, CFP, is a CBS News business analyst. A former options trader and CIO of an investment advisory firm, she welcomes comments and questions at [email protected]. Check her website at www.jillonmoney.com.
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