Bank regulators in the United States are grappling with the aftermath of high-profile bank failures in March. The New York Department of Financial Services (NYDFS) published its internal review of Signature Bank supervision on April 28, the same day the U.S. Federal Reserve Board released its review of the handling of Silicon Valley Bank (SVB).
The Fed review started with findings that had been noted by commentators: SVB’s management failed to manage its risks, and supervisors “did not fully appreciate the extent of the vulnerabilities” of the bank as it “grew in size and complexity,” even though “SVB’s foundational problems were widespread and well-known.”
Furthermore, supervisors failed to act quickly enough on the vulnerabilities they did identify. Annual capital, asset quality, management, earnings, liquidity and sensitivity to market risk (CAMELS) exams had uncovered deficiencies in 2021 and 2022, but changes in the supervisory team and the bank’s rapid growth got in the way of handling them.
The failures set off shockwaves serious enough that U.S. President Joe Biden felt the need to tweet a response. The NYDFS report noted that signature bank had also experienced rapid growth in the years immediately before its closure. Risk management issues were identified at Signature Bank in annual reviews in 2018 and 2019, but they were only partially addressed.
The instability in the banking sector did not stop with Signature Bank’s closing. Swiss bank Credit Suisse was subject to a rescue buyout by UBS a week later. The U.S. bank First Republic, which also was characterized by a high volume of uninsured deposits, began to decline in share price in March as well.
Regulatory easing due to the passage of the Economic Growth, Regulatory Relief, and Consumer Protection Act in 2019 led to a “tailoring approach” to regulating many large banks, including SVB. Supervisory policy was changed at the same time to place greater emphasis on due process, slowing down regulatory action, according to the report.
The Fed conceded, however, “while higher supervisory and regulatory requirements may not have prevented the firm’s failure, they would likely have bolstered the resilience of Silicon Valley Bank.” The NYDFS presented its decision to close down Signature Bank as the culmination of a process that began with the bankruptcy of crypto exchange FTX in November.
Due to its crypto-friendly reputation, the NYDFS began requiring Signature to “provide periodic liquidity updates,” which were made daily in January and switched to monitoring calls on March 8. The NYDFS worked with federal regulators over the weekend of March 11-12 to assess Signature Bank’s viability after it “narrowly survived the immediate deposit run” of the preceding week.
Regulators decided on March 12 that the bank’s liquidity was inadequate and its reporting was unreliable. So they took possession of the bank and appointed the FDIC as receiver.
The NYDFS review examined the way that regulators had dealt with Signature Bank before its failure. There were problems relating to supervision. “Internal staff constraints limited DFS’s ability to staff examinations adequately,” the report said.
Also, “DFS’s internal processes need clearer guidelines for when examiners need to escalate regulatory concerns or instances in which a bank fails to remediate findings in a timely fashion.” In addition, the mechanisms of the review process within the NYDFS were “cumbersome” and lacked deadlines.
These findings lead to New York regulators considering whether banks need to conduct table-top exercises demonstrating their operational readiness to collect and produce accurate financial data at a rapid pace and in a stress scenario.
With regulators trying to come to grips with what went wrong, many in the industry have been left to reflect on what lessons can be learned from these failures. It is evident that the rapid growth of some of these banks resulted in the outpacing of development of their risk control framework.
Furthermore, the changing regulatory landscape has also been called into question. Regulatory easing led to a “tailoring approach” to regulating many large banks, including SVB. Supervisory policy was changed at the same time to place greater emphasis on due process, slowing down regulatory action.
This case highlights the need for regulators to stay vigilant in ensuring that the banks that they are tasked with overseeing are complying with necessary regulations. This means actively reviewing their risk control framework, especially in light of rapid growth, and not compromising the efficiency of the regulatory process for the sake of due process.