CRS Reviews Federal Response to Bank Failures
Commentary by Steven Lofchie
The Congressional Research Service ("CRS") reviewed federal authority over financial institution insolvency and the response to the failures of Silicon Valley Bank ("SVB"), Signature Bank and First Republic Bank.
In a lengthy Report, CRS analyzed "the FDIC’s authority over failed IDIs, the process by which IDIs are closed and the FDIC is appointed conservator or receiver, the FDIC’s powers as conservator and receiver, the resolution options utilized by the FDIC applying the 'least-cost resolution' requirement, the receiver claims process, and the FDIC’s authority to hold officers and directors accountable for an IDI’s failure."
CRS also reviewed the continuing policy discussion on what went wrong and how to address the problem.
As to the Federal Reserve Board’s ("FRB") findings regarding SVB’s collapse, CRS highlighted, among other things:
- SVB’s failure to manage interest rate and liquidity risks;
- the FRB’s failure to assess SVB’s stability in the midst of rapid growth;
- the FRB’s failure to quickly respond to stability concerns once they were identified; and
- the FRB’s inability to effectively supervise SVB after eliminating enhanced prudential regulations for bank holding companies with assets of between $100 and $250 billion.
As to the FDIC’s review of Signature Bank's failing, CRS highlighted the agency's findings of poor management, and how the contagion of SVB's failure contributed to Signature’s closing.
CRS reviewed several bills under consideration that are aimed at increasing bank safety regulations and strengthening the FDIC’s receivership powers.
Commentary
It is understandable that the FRB assigns some blame for the various bank failures on the Economic Growth, Regulatory Relief, and Consumer Protection Act which they said, “impeded effective supervision [of SVB] by reducing standards, increasing complexity, and promoting a less assertive supervisory approach." It is not as obvious how well this blame is placed.
The reasons why the various banks failed appears to be straightforward: massive exposure to interest rate risk combined with complete inattention to risk management and over-reliance on volatile sources of funding. These were not banks that seemed to be engaged in complicated transactions or doing business in exotic locations.
Bank regulators may derive less benefit from more authority than they would derive from returning to the basics of financial risk management.
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The Congressional Research Service reviewed the remedial actions taken by the FDIC in response to the closures of Silicon Valley Bank and Signature Bank.
