U.S. regulators are under scrutiny after they may have missed clear signs of growing risk at Silicon Valley Bank, the tech-focused financial institution that failed over the weekend following a run on its deposits.
The Federal Deposit Insurance Corporation took over the bank Friday and the regulator, along with the Federal Reserve, announced new emergency programs Sunday to ensure that all depositors will have their funds guaranteed even beyond the standard $250,000 per account the FDIC typically insures.
Read more: ‘The spirit of Dodd-Frank is dead.’ Regulators swore off bailouts, until they didn’t.
The failure of SVB
“is a black eye for regulators,” Ian Katz, managing director at Capital Alpha Partners, who covers financial policy, told MarketWatch.
Democrats in Congress have been quick to blame a 2018 law signed by former President Donald Trump, which rolled back regulations on mid-sized banks
like SVB, as the primary reason for its failure.
Had the law not been passed, the bank “would have been a subject to stronger liquidity and capital requirements” as well as Fed stress tests that would have revealed vulnerabilities on its balance sheet, Democratic Sen. Elizabeth Warren of Massachusetts wrote in the New York Times Monday.
Proponents of the 2018 law have countered that the law did not bar the Fed from imposing stricter oversight of the bank if it saw fit.
“The primary regulator of SVB was the San Francisco Fed, and they missed this one for sure,” Todd Phillips, a banking law expert and fellow at the Roosevelt Institute, told MarketWatch.
The rapid growth of SVB’s asset base — which nearly doubled to more than $210 billion between 2020 and the end of last year — as well as its reliance on the Federal Home Loan Bank of San Francisco for funding, were “red flags” that the Fed and California State regulators should have noticed, according to Aaron Klein, a former deputy assistant secretary for economic policy at the Treasury Department.
The Federal Reserve Board announced Monday that Vice Chair for Supervision Michael S. Barr is leading a review of the its supervision and regulation of the bank that will be publicly released on May 1.
“The events surrounding Silicon Valley Bank demand a thorough, transparent, and swift review by the Federal Reserve,” said Fed Chair Jerome Powell in a statement.
While the primary blame for the bank’s failure rests with its leadership, regulators do shoulder some of the blame and will likely respond by intensifying their supervision of the banking sector, Katz said.
That could come in the form of tougher capital and liquidity requirements for smaller banks, though there is a reason the 2018 effort to roll back regulations on these institutions were successful.
“Lawmakers on both sides of the aisle consistently push for lighter supervision of small banks,” Katz wrote in a Sunday note to clients. “In Congress, community lenders are portrayed as mom, apple pie and the American flag rolled into one.”
Greg Robb contributed to this article