Regulation and Deregulation of Industry

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How a Trump-Era Rollback Mattered for Silicon Valley Bank’s Demise

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An under-the-radar change to the way regional banks are supervised may have helped the bank’s rapidly growing risks to go unresolved.WASHINGTON — Silicon Valley Bank was growing steadily in 2018 and 2019 — and supervisors at its primary overseer, the Federal Reserve Bank of San Francisco, were preparing it for a stricter oversight group, one in which specialists from around the Fed system would vet its risks and point out weak spots.But a decision from officials in Washington halted that move.The Federal Reserve Board — which sets the Fed’s standards for banking regulation — was in the process of putting into effect a bipartisan 2018 law that aimed to make regulation less onerous for small and midsize banks. As the board did that, Randal K. Quarles, the Trump-appointed vice chair for supervision, and his colleagues also chose to recalibrate how banks were supervised in line with the new requirements.As a result, Silicon Valley Bank’s move to the more rigorous oversight group would be delayed. The bank would previously have advanced to the Large and Foreign Bank Organization group after its assets had averaged more than $50 billion for a year; now, that shift would not come until it consistently averaged more than $100 billion in assets.The change proved fateful. Silicon Valley Bank did not fully move to the stronger oversight group until late 2021. Its assets had nearly doubled over the course of that year, to about $200 billion, by the time it came under more intense supervision.By that point, many of the issues that would cause its demise had already begun festering. Those included a customer base heavily dependent on the success of the technology industry, an unusually large share of deposits above the $250,000 limit that the government insures in the event of a bank collapse and an executive team that paid little attention to risk management.Those weak spots appear to have gone unresolved when Silicon Valley Bank was being overseen the way that small and regional banks are: by a small team of supervisors who were in some cases generalists.When the bank finally entered more sophisticated supervision for big banks in late 2021, putting it under the purview of a bigger team of specialist bank overseers with input from around the Fed system, it was immediately issued six citations. Those flagged various problems, including how it was managing its ability to raise cash quickly in times of trouble. By the next summer, its management was rated deficient, and by early 2023, intense scrutiny of the bank had stretched to the Fed’s highest reaches.Big questions remain about why supervisors didn’t do more to ensure that shortcomings were addressed once they became alarmed enough to begin issuing citations. The Fed is conducting an internal investigation of what happened, with results expected on May 1.Michael Barr, the Fed’s vice chair for supervision, told lawmakers this week that by the time Silicon Valley Bank came under intense oversight and problems were fully recognized, “in a sense, it was already very late in the process.”Shuran Huang for The New York TimesBut the picture that is emerging is one in which a slow reaction in 2022 was not the sole problem: Silicon Valley Bank’s difficulties also appear to have come to the fore too late to fix them easily, in part because of the Trump-era rollbacks. By deciding to move banks into large-bank oversight much later, Mr. Quarles and his colleagues had created a system that treated even sizable and rapidly ballooning banks with a light touch when it came to how aggressively they were monitored.That has caught the attention of officials from the Fed and the White House as they sort through the fallout left by Silicon Valley Bank’s collapse on March 10 and ask what lessons should be learned.“The way the Federal Reserve’s regulation set up the structure for approach to supervision treated firms in the $50 to $100 billion range with lower levels of requirements,” Michael Barr, the Fed’s vice chair for supervision, told lawmakers this week. By the time Silicon Valley Bank’s problems were fully recognized, he said, “in a sense, it was already very late in the process.”About five people were supervising Silicon Valley Bank in the years before its move up to big-bank oversight, according to a person familiar with the matter. The bank was subject to quarterly reviews, and its overseers could choose to put it through horizontal reviews — thorough check-ins that test for a particular weakness by comparing a bank with firms of similar size. But those would not have been a standard part of its oversight, based on the way the Fed runs supervision for small and regional banks.As the bank grew and moved up to large-bank oversight, the size of the supervisory team dedicated to it swelled. By the time it failed, about 20 people were working on Silicon Valley Bank’s supervision, Mr. Barr said this week. It had been put through horizontal reviews, which had flagged serious risks.But such warnings often take time to translate into action. Although the bank’s overseers started pointing out big issues in late 2021, banks typically get leeway to fix problems before they are penalized.“One of the defining features of supervision is that it is an iterative process,” said Kathryn Judge, a financial regulation expert at Columbia Law School.The Fed’s response to the problems at Silicon Valley Bank seemed to be halting even after it recognized risks. Surprisingly, the firm was given a satisfactory liquidity rating in early 2022, after regulators had begun flagging problems, Mr. Barr acknowledged this week. Several people familiar with how supervising operates found that unusual.“We’re trying to understand how that is consistent with the other material,” Mr. Barr said this week. “The question is, why wasn’t that escalated and why wasn’t further action taken?”Yet the high liquidity rating could also tie back to the bank’s delayed move to the large bank supervision group. Bank supervisors sometimes treat a bank more gently during its first year of tougher oversight, one person said, as it adjusts to more onerous regulator attention.There was also turmoil in the San Francisco Fed’s supervisory ranks around the time that Silicon Valley Bank’s risks were growing.Aaron Wojack for The New York TimesThere was also turmoil in the San Francisco Fed’s supervisory ranks around the time that Silicon Valley Bank’s risks were growing. Mary Daly, the president of the reserve bank, had called a meeting in 2019 with a number of the bank supervisory group’s leaders to insist that they work on improving employee satisfaction scores, according to people with knowledge of the event. The meeting was previously reported by Bloomberg.Of all the San Francisco Fed employees, bank supervisors had the lowest satisfaction ratings, with employees reporting that they might face retribution if they spoke out or had different opinions, according to one person.Several supervision officials departed in the following years, retiring or leaving for other reasons. As a result, relatively new managers were at the wheel as Silicon Valley Bank’s risks grew and became clearer.It’s hard to assess whether supervisors in San Francisco — and staff members at the Fed board, who would have been involved in rating Silicon Valley Bank — were unusually slow to respond to the bank’s problems given the secrecy surrounding bank oversight, Ms. Judge said.“We don’t have a baseline,” she said.Even as the Fed tries to understand why problems were not addressed more promptly, the fact that Silicon Valley Bank remained under less rigorous oversight that may not have tested for its specific weaknesses until relatively late in the game is increasingly in focus.“The Federal Reserve system of supervision and regulation is based on a tailored approach,” Mr. Barr said this week. “That framework, which really focuses on asset size, is not sensitive to the kinds of problems we saw here with respect to rapid growth and a concentrated business model.”Plus, the 2018 law and the Fed’s implementation of it probably affected Silicon Valley Bank’s oversight in other ways. The Fed would probably have begun administering full stress tests on the bank earlier without the changes, and the bank might have had to shore up its ability to raise money in a pinch to comply with the “liquidity coverage ratio,” some research has suggested.The White House called on Thursday for regulators to consider reinstating stronger rules for banks with assets of $100 billion to $250 billion. And the Fed is both re-examining the size cutoffs for stricter bank oversight and working on ways to test for “novel” risks that may not tie back cleanly to size, Mr. Barr said this week.But Mr. Quarles, who carried out the tailoring of the 2018 bank rule, has insisted that the bank’s collapse was not the result of changes that the law required or that he chose to make. Even the simplest rung of supervision should have caught the obvious problems that killed Silicon Valley Bank, he said, including a lack of protection against rising interest rates.“It was the simplest risk imaginable,” he said in interview. More

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    SVB Hearing Takeaways: Bank Failures Spur a Blame Game, But Few Solutions

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    Federal regulators faced more than two hours of intense questioning from lawmakers on Tuesday about what caused the failures of Silicon Valley Bank and Signature Bank, the red flags that went unheeded and the steps that must be taken to avoid future collapses that could rattle the United States financial system.There was bipartisan concern about the state of the nation’s banks that in many cases blurred the usual party lines, where Democrats want more strict oversight and Republicans call for looser regulations. But there was also a substantial amount of buck-passing and finger pointing as the officials from the Federal Reserve, the Federal Deposit Insurance Corporation and the Treasury Department sought to make sense of the second largest bank failure in American history.The hearing — featuring Michael S. Barr, the Federal Reserve’s vice chair for supervision, Martin Gruenberg, chair of the Federal Deposit Insurance Corporation and Nellie Liang, the Treasury’s under secretary for domestic finance — marked the beginning of what will be an extended inquiry by Congress and the regulators themselves into what went wrong.Regulators blamed the banks.From the outset, the regulators made clear what they believed to be the primary reason that Silicon Valley Bank failed: It was poorly managed and allowed risks to build up to the point that the bank collapsed.Mr. Barr said in his testimony that “SVB’s failure is a textbook case of mismanagement.” He added that Fed officials flagged problems to the bank as far back as November 2021, but the bank failed to deal with them.Punishment for executives is on the table.Lawmakers remained intent on ensuring that the executives of the banks are punished if they did anything improper leading up to the failures. They also expressed particular concern about last minute stock sales by Silicon Valley Bank officials.Regulators said that they were limited in their power to claw back compensation but that they can impose financial and other penalties if their continuing investigation finds wrongdoing.Regulators blamed Silicon Valley Bank’s collapse on poor management during more than two hours of questioning, Kenny Holston/The New York TimesThe Fed could have done more.The Federal Reserve is under particular scrutiny regarding when it knew that things were amiss at SVB.Even though Fed supervisors had flagged weaknesses at SVB as far back as 2021, Mr. Barr said he first learned of SVB’s problems last month — suggesting it took a long time for concerns to be escalated to the Fed board and its vice chair of supervision.Mr. Barr said that the Federal Reserve officials will be discussing any potential missed warning signs in their internal review and that “we expect to be held accountable.”Regulators say they need more authority.All three regulators said that they believed that financial regulations needed to be tightened following the recent stress in the banking sector.Mr. Barr pointed to Federal Reserve regulations, which were enacted during the Trump administration in 2019, that exempted Silicon Valley Bank from being stress tested and suggested that those need to be revisited.Some Democrats on the committee emphasized the notion that deregulation left agencies without the tools they needed to address issues at smaller banks.What’s next?The House Financial Services Committee will hold its own hearing on Wednesday, and question the same officials.Reviews by the F.D.I.C. and the Fed are expected to be completed by May 1 and members of the Senate committee from both parties suggested they’d be interested in hearing from regulators after those inquiries are concluded.There is also an ongoing debate about raising the bank deposit insurance cap from $250,000 and imposing stiffer penalties on executives at banks that fail.Lawmakers have also asked the Government Accountability Office to study the effectiveness of the bank supervisory regime and make recommendations for changes. But it’s not clear whether any suggested changes would have enough bipartisan support to overcome a divided Congress. More

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    How Far Can Regulators Go to Protect Uninsured Deposits?

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    A decision by federal regulators to ensure that depositors at Silicon Valley Bank and Signature Bank did not lose money regardless of how much they had in their accounts, has aroused populist anger as well as questions of what government agencies can and cannot do to protect uninsured accounts.Under current law, the government insures bank deposits only up to $250,000. Any increase in that limit would require congressional authorization. But regulators can protect deposits over that amount, like they did at Silicon Valley Bank and Signature Bank, if they determine that the banks’ failures pose a systemic risk.They can also request approval from Congress to temporarily raise the cap or eliminate it altogether, though some lawmakers have already expressed unwillingness to do so.Janet L. Yellen, the Treasury secretary, suggested last week that regulators were ready to make uninsured depositors at other banks whole if necessary and “if smaller institutions suffer deposit runs that pose the risk of contagion.”Amid widespread bank failures in the Great Depression, Congress created the Federal Deposit Insurance Corporation in 1933 to insure deposits under $2,500. It has increased that limit over the years, recently lifting it to $250,000 from $100,000 for IRAs in 2006 and for checking accounts in 2008. The Dodd-Frank Act of 2010 made the increase permanent.In the wake of the 2008 financial crisis, the F.D.I.C. evoked the systemic risk exception to create a program that guaranteed new debt issued by banks for three years and insured all deposits if they did not bear interest (typically, accounts used by businesses for payroll).The decision to grant the exception was reached “after three days of intense negotiation,” according to an account of the episode by the F.D.I.C.’s historian, and had to be approved by the Treasury secretary in consultation with the president and two-thirds of the boards of both the F.D.I.C. and the Federal Reserve.But regulators no longer have the ability to create such a program unilaterally, as the Dodd-Frank Act eliminated the F.D.I.C.’s authority to temporarily insure accounts with more assets than the statutory limit. Under that law, the agency can only do so if it is the receiver of a failed bank or if it has approval from Congress.“Congress was so concerned with moral hazard and ‘bailouts’ that it seemed to limit the receipt of F.D.I.C. assistance to the imposition of an F.D.I.C. receivership, unless Congress specifically approved a subsequent F.D.I.C. alternative,” said Jeffrey N. Gordon, a law professor at Columbia University and expert on financial regulation.During the coronavirus pandemic, Congress in 2020 temporarily lifted the deposit limit on noninterest bearing accounts. But in congressional testimony last week, Ms. Yellen said her agency was not seeking to lift the cap altogether and insure all deposits over $250,000. Rather, she said, regulators would seek the systemic risk exception for failed banks through a “case-by-case determination.”Others, though, have pushed for more sweeping coverage. Some lawmakers are considering temporarily increasing the deposit cap while others have proposed eliminating it altogether.The Dodd-Frank Act provides a fast-track process for such requests, allowing the Congress to expedite approval by adopting a joint resolution. Sheila Blair, the former president of the F.D.I.C. during the financial crisis, recently urged Congress to initiate the procedure.“We want people to make payroll. We want people to be able to pay their businesses and others to pay their bills. So I think that is one area where unlimited coverage, at least on a temporary basis, makes a lot of sense,” she said in a Washington Post event last week.News reports have also suggested that regulators are looking at other mechanisms of acting without Congress, specifically by tapping into the Exchange Stabilization Fund. The Treasury secretary has broad authority to use the emergency reserve, which was created in 1934 to stabilize the value of the dollar but has been used over the years for a host of other purposes.Mr. Gordon noted that using the exchange fund alone would not work to protect uninsured deposits, given that it is “paltry compared to the Deposit Insurance Fund and unlike the D.I.F. has no mechanism for replenishment.” But he said it would be possible to use the fund as a backstop in a program operated by the Federal Reserve that lends against bank assets.“What this means is that banks would have an easy way to raise cash to pay off all deposits,” he said. More

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    Silicon Valley Bank’s Risks Went Deep. Congress Wants to Know Why.

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    Lapses at the bank will be a focus as a top Federal Reserve official testifies to House and Senate committees this week.WASHINGTON — The nation’s top financial regulators will face a grilling from lawmakers on Tuesday over the collapse of Silicon Valley Bank as they push to understand why the firm was allowed to grow so rapidly and build up so much risk that it failed, requiring a government rescue for depositors and sending shock waves across global markets.Michael S. Barr, the Federal Reserve’s vice chair for supervision, will testify before the Senate Banking Committee on Tuesday alongside Martin Gruenberg, chair of the Federal Deposit Insurance Corporation, and Nellie Liang, the Treasury’s under secretary for domestic finance. The same officials are set to testify before the House Financial Services Committee on Wednesday.Lawmakers are expected to focus on what went wrong. The picture that has emerged so far is of a bank that grew ravenously and ran itself more like a start-up than a 40-year-old lender. The bank took in a large share of big — and uninsured — depositors even as it used its assets to double down on a bet that interest rates would stay low.Instead, the Fed raised rates sharply to slow rapid inflation, reducing the market value of Silicon Valley Bank’s large holdings of longer-term bonds and making them less attractive as new securities offered higher returns. When SVB sold some of its holdings to shore up its balance sheet, it incurred big losses.That spooked its customers, many of whom had deposits far above the $250,000 limit on what the government would guarantee in the event the bank failed. They raced to pull their money out, and the bank collapsed on March 10.The question is why supervisors at the Fed failed to stop the bank from making dangerous mistakes that seem obvious in hindsight. And the answer is important: If the Fed missed the problems because of widespread flaws in the ways banks are overseen and regulated, it could mean other weak spots in the industry are slipping through the cracks.Here is a rundown of what is already known, and where lawmakers could push for firmer answers this week.As Silicon Valley Bank grew, the Fed found problems.Silicon Valley Bank went to just above $115 billion in assets at the end of 2020 from $71 billion at the end of 2019. That growth catapulted it to a new level of oversight at the Fed by late 2021 — into the purview the Large and Foreign Banking Organization group.That group includes a mix of staff members from the Fed’s regional reserve banks and its Board of Governors in Washington. Banks that are large enough to fall under its remit get more scrutiny than smaller organizations.Silicon Valley Bank would most likely have moved to that more onerous oversight rung at least a couple of years earlier had it not been for a watering-down of rules that the Fed carried out under Randal K. Quarles, who was its supervisory vice chair during the Trump administration.By the time the bank had come under intense scrutiny, problems had already started: Fed officials found big issues in their first sweeping review.Supervisors promptly issued six citations — called matters requiring attention or matters requiring immediate attention — that amounted to a warning that SVB was doing a faulty job of managing its ability to raise cash in a pinch if needed.It is not clear precisely what those citations said, because the Fed has not released them. By the time the bank went through a full supervisory review in 2022, supervisors were seeing glimmers of progress on the issues, a person familiar with the matter said.Michael S. Barr, the Federal Reserve’s vice chair for supervision, is scheduled to testify at the hearings.Alex Wong/Getty ImagesSilicon Valley Bank was given a ‘satisfactory’ rating despite its issues.Perhaps in part because of that progress, SVB’s liquidity — its ability to come up with money quickly in the face of trouble — was rated satisfactory last year.Around that time, bank management was intensifying its bet that rates would stop climbing. SVB had been maintaining protection against rising rates on a sliver of its bond portfolio — but began to drop even those in early 2022, booking millions in profits by selling off the protection. According to a company presentation, SVB was newly focused on a scenario in which borrowing costs fell.That was a bad call. The Fed raised interest rates at the fastest pace since the 1980s last year as it tried to control rapid inflation — and Silicon Valley Bank was suddenly staring down huge losses.The bank’s demise set off cascading concerns.By mid-2022, Fed supervisors had focused a skeptical eye on SVB’s management, and it was barred from growing by buying other institutions. But by the time Fed officials had reviewed the bank’s liquidity fully again in 2023, its problems had turned crippling.SVB had been borrowing heavily from the Federal Home Loan Bank of San Francisco for months to raise cash. On March 8, the bank announced that it would need to raise capital after selling its bond portfolio at a loss.On March 9, customers tried to pull $42 billion from SVB in one day — the fastest bank run in history — and it had to scramble to tap the Fed’s backup funding source, the discount window. What loans it could get in exchange for its assets were not enough. On March 10, it failed.That only started the problems for the broader banking system. Uninsured depositors at other banks began to nervously eye their own institutions. On March 12 — a Sunday evening — regulators announced that they were closing another firm, Signature Bank.To forestall a nationwide bank run, regulators said they would make sure even the failed banks’ big depositors were paid back in full, and the Fed opened a new program to help banks get cash in a pinch.But that did not immediately stem the bleeding: Fed data showed that bank deposits fell by $98 billion to $17.5 trillion in the week that ended March 15, the biggest decline in nearly a year. But even those numbers hid a trend playing out under the surface: People moved their money away from smaller banks to banking giants that they thought were less likely to fail.Deposits at small banks dropped by $120 billion, while those at the 25 largest banks shot up by about $67 billion. Government officials have said those flows have abated.As customers and investors began to probe for weak spots in the financial system, other banks found themselves in tumult — including Credit Suisse in Switzerland, which was taken over, and First Republic, which took a capital injection from other banks.Lawmakers from both parties want answers.“It is concerning that Federal Reserve staff did not intervene in a timely manner and use the powerful supervisory and enforcement tools available to prevent the firm’s failure and subsequent market uncertainty,” Republicans on the House Financial Services Committee wrote in a letter released Friday.Senator Rick Scott, Republican of Florida, and Senator Elizabeth Warren, Democrat of Massachusetts, have introduced legislation to require a presidentially appointed and Senate-confirmed inspector general at the Fed and the Consumer Financial Protection Bureau. The Fed already has an internal watchdog, but this one would be appointed by the president.Recent bank failures “serve as a clear reminder that banks cannot be left to supervise themselves,” Ms. Warren warned. She has also pushed for an inspector general review of what went wrong with Silicon Valley Bank.Congress wants to know whom to blame.Much of the focus in recent weeks has been on who at the Fed is to blame. Mr. Barr started in his role midway through 2022, so he has mostly been left out of the finger-pointing.Some have pointed to Mary C. Daly, president of the Federal Reserve Bank of San Francisco. Presidents of regional Fed banks typically do not play a leading role in bank oversight, though they can flag gaping problems to the Federal Reserve Board in extreme cases.Others have pointed to Mr. Barr’s predecessor, Mr. Quarles, who left his supervisory vice chair post in October 2021. Mr. Quarles helped to roll back regulations, and people familiar with his time at the Fed have said his tone when it came to supervision — which he thought should be more transparent and predictable — led many bank overseers to take a less strict approach.And some critics have suggested that Jerome H. Powell, the Fed chair, helped to enable the problems by voting for Mr. Quarles’s deregulatory changes in 2018 and 2019.An internal Fed review of what went awry is set for release on May 1. And the central bank has expressed an openness to an outside inquiry.“It’s 100 percent certainty that there will be independent investigations and outside investigations and all that,” Mr. Powell said at news conference last week. “Of course we welcome that.” More

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    Fed Vice Chair Calls Silicon Valley Bank a ‘Textbook Case of Mismanagement’

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    The Federal Reserve’s top bank cop blamed Silicon Valley Bank’s leaders, while previewing the cental bank’s review of its faulty oversight.WASHINGTON — The Federal Reserve’s vice chair for supervision blamed Silicon Valley Bank’s demise on poor internal management and excessive risk-taking and detailed the steps that Fed supervisors took to address the snowballing problems that ultimately killed the company, according to prepared remarks ahead of a congressional hearing on Tuesday.The vice chair, Michael Barr, who will appear at a Senate Banking Committee hearing along with other regulators, also acknowledged in his written testimony that bank supervision and regulation might need to change in the wake of the collapse.Silicon Valley Bank’s collapse this month sent shock-waves across the global banking system, prompting many depositors to pull their cash out of regional and smaller banks over concerns they could lose their money. The tumult prompted a sweeping response from the government, which pledged to make sure that even big and uninsured depositors at Silicon Valley Bank and another failed bank — Signature — were paid back. The Fed itself set up an emergency lending program to help banks who needed to raise cash in a pinch.But as the upheaval shows tentative signs of calming, lawmakers are demanding to know what went wrong.Mr. Barr will testify alongside Martin Gruenberg, chairman of the Federal Deposit Insurance Corporation, and Nellie Liang, the Treasury’s under secretary for domestic finance.Mr. Gruenberg suggested in his prepared remarks, which were also released on Monday afternoon, that the F.D.I.C. would review both its oversight of Signature bank and the suitability of America’s deposit insurance system — including coverage levels, which now cap at $250,000 — in the wake of the debacle. The F.D.I.C. will release the results of its review by May 1.Silicon Valley Bank’s collapse sent shock-waves across the global banking system, prompting many depositors to pull their cash out of regional and smaller banks.Ian C. Bates for The New York TimesThe Fed was Silicon Valley Bank’s primary regulator, and it too was reviewing why it had failed to stop risks that were in plain sight. Silicon Valley Bank had grown rapidly. Its depositors were heavily concentrated in the volatile technology industry. Many of them had more than $250,000 in their accounts, meaning that their deposits were past the federal insurance limit and that they were more prone to run at the first sign of trouble. The bank’s leaders had made a bad bet that interest rates would stabilize or fall, and the bank faced big losses when rates instead rose in 2022.Mr. Barr was expected to face questions about why those glaring issues had not been stopped — and he laid out an early defense in his speech text.“SVB’s failure is a textbook case of mismanagement,” he said, while adding that the “failure demands a thorough review of what happened, including the Federal Reserve’s oversight of the bank.”He noted that Fed supervisors spotted a range of problems in late 2021 and throughout 2022, even rating the bank’s management as deficient, which barred it from growing by acquiring other companies. And he said that supervisors told board officials in mid-February that they were actively engaged with SVB on its interest rate risk.“As it turned out, the full extent of the bank’s vulnerability was not apparent until the unexpected bank run on March 9,” Mr. Barr added. “In our review, we are focusing on whether the Federal Reserve’s supervision was appropriate for the rapid growth and vulnerabilities of the bank.”Yet Mr. Barr was also likely to face questions — especially from Democrats — about whether changes to Fed regulation and supervision in recent years could have paved the way for the implosion. Congress passed a law that made midsize bank oversight less onerous in 2018, and Mr. Barr’s predecessor, Randal K. Quarles, an appointee of President Donald J. Trump, had carried out and in some cases built upon those changes in 2019.Mr. Barr, a Biden appointee, started in his role in mid-2022. He has been carrying out what the Fed calls a “holistic review” of bank capital standards, but that has yet to be completed.And questions could arise about issues that Mr. Barr did not address in his remarks. For instance, while he pointed out that supervisors were aware of risks at Silicon Valley Bank, he did not note that the group of Fed Board staff members and supervisors overseeing the bank gave it a satisfactory rating when it came to liquidity in 2022 — even after a range of problems, including some with liquidity risk management, had already been flagged.Mr. Barr did suggest that the Fed’s internal review, which he is leading and is set to conclude by May 1, was assessing whether supervisors could “distinguish risks that pose a material threat to a bank’s safety and soundness” and whether “supervisors have the tools to mitigate threats.”But that may be too little to satisfy lawmakers, many of whom are calling for an independent review of what went wrong. Several had sent letters to the Fed requesting a thorough release of materials related to how Silicon Valley Bank was overseen.Ms. Liang said in prepared remarks that the Biden administration was closely monitoring the banking sector and the broader financial system for signs of weakness and defended the handling of the bank failures.“These actions have helped to stabilize deposits throughout the country and provided depositors with confidence that their funds are safe,” she said.Echoing remarks made by Treasury Secretary Janet L. Yellen last week, Ms. Liang indicated that the Biden administration was prepared to take additional actions.“They are tools we would use again if warranted to ensure that Americans’ deposits are safe,” she said.Mr. Gruenberg suggested that the widespread problems caused by the failure of two banks that were not considered systemic under existing regulatory rules indicated that regulators needed to pay more attention to banks of their size.“Given the financial stability risks caused by the two failed banks, the methods for planning and carrying out a resolution of banks with assets of $100 billion or more also merit special attention,” he said.He said the F.D.I.C. had already begun investigating how senior leaders at both banks contributed to losses through bad management, adding, in what seemed like a roundabout reference to President Biden’s call for new legislation on clawbacks from failed bank executives’ stock sales, that the regulator had the power to hold individual executives accountable.Mr. Gruenberg also seemed to nod to community bank lobbyists’ recent protesting of having to pay for making uninsured depositors at Signature and Silicon Valley Bank whole by participating in a special assessment by the F.D.I.C. to replenish the deposit insurance fund.“The law provides the F.D.I.C. authority, in implementing the assessment, to consider ‘the types of entities that benefit from any action taken or assistance provided,’” Mr. Gruenberg said. 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    Powell and Yellen Suggest Need to Review Regulations After Bank Failures

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    Proposals for more scrutiny of the financial sector are meeting resistance from industry and Congress.WASHINGTON — Two of the nation’s top economic policymakers on Wednesday said they were focused on determining how the failure of Silicon Valley Bank had happened and suggested changes to federal regulation and oversight might be needed to prevent future runs on American banks.The discussion of stricter oversight by Jerome H. Powell, the Federal Reserve chair, and Treasury Secretary Janet L. Yellen came as lawmakers, the financial industry and investors are working to figure out why Silicon Valley Bank and Signature Bank failed and as policymakers try to ensure other firms don’t suffer the same fate.At a news conference following the Fed’s announcement that it would raise interest rates by a quarter percentage point, Mr. Powell said he was focused on the question of what had gone wrong at Silicon Valley Bank, which was overseen by the Federal Reserve Bank of San Francisco.The Fed has initiated an internal review into the supervision and regulation of Silicon Valley Bank, with the central bank’s vice chair for supervision, Michael S. Barr, leading the probe. Asked at the news conference whether he would support an independent examination — one not conducted by the Fed — Mr. Powell said he would welcome more scrutiny.“There’s 100 percent certainty that there will be outside investigations,” he said.Mr. Powell criticized bank executives, who he said had “failed badly,” but also conceded that Fed supervisors had not been effective at preventing the bank from sliding into insolvency. He said he expected the central bank’s own report to outline concrete steps to avoid a repeat of the crisis.“Clearly we do need to strengthen supervision and regulation,” Mr. Powell said. “And I assume that there’ll be recommendations coming out of the report, and I plan on supporting them and supporting their implementation.”Ms. Yellen echoed his comments at a Senate hearing on Wednesday afternoon, saying policymakers needed to take a hard look at the troubles plaguing the banking industry, including what led to the downfalls of Silicon Valley Bank, on March 10, and Signature Bank, which was seized by regulators on March 12.“I absolutely think that it’s appropriate to conduct a very thorough review of what factors were responsible for the failure of these banks,” she said. “Certainly we should be reconsidering what we need to shore up regulation to prevent this.”Ms. Yellen said she supports legislation that would penalize executives whose actions lead to bank failures and restore rules that were rolled back during the Trump administration that gave the Financial Stability Oversight Council more power to scrutinize nonbank financial institutions.Economic policymakers are trying to figure out why Silicon Valley Bank failed and to ensure other firms don’t suffer the same fate.Ulysses Ortega for The New York TimesMs. Yellen also said that because bank runs “may more readily happen now,” it might make sense to update stress test models and bank liquidity requirements with new assumptions about how quickly deposits could flee. Mr. Powell also addressed the speed of the outflows of funds from Silicon Valley Bank, which was hastened by social media and the ease of moving money with smartphones, suggesting that new rules are needed to keep up with advances in technology.For the time being, Ms. Yellen said she was focused on using existing tools to restore confidence in the banking system.The Biden administration likely has little choice because of mounting resistance to new financial regulations within Congress and the banking industry. That opposition was clear on Wednesday as lawmakers and executives gathered at an American Bankers Association conference in Washington.Although there was widespread support for uncovering the roots of the current turmoil, influential lawmakers expressed a desire for caution in considering new curbs on the financial sector.“I think it’s too early to know whether or not new legislation will be necessary,” said Representative Patrick T. McHenry of North Carolina, the Republican chairman of the House Financial Services committee.Mr. McHenry warned that proposed increases to the Federal Deposit Insurance Corporation deposit insurance limit could lead to unintended consequences and “moral hazard,” and said that “firms need to be able to fail.”“If you have a hammer, the world looks like a nail,” Mr. McHenry said of the desire to impose more onerous regulations on banks.The banking industry, which has welcomed the government’s support of the sector this month, also urged lawmakers not to respond with more scrutiny.“We should not rush to make changes when we still do not fully know what happened and why,” Rob Nichols, chief executive of the American Bankers Association, said on Wednesday.But Senator Sherrod Brown of Ohio, the Democratic chairman of the Senate Banking Committee, said the failures of Silicon Valley Bank and Signature Bank this month had shaken the nation’s trust in the banking system. He vowed to hold the executives of those banks accountable and press regulators to review what went wrong.Mr. Brown also called for legislation to “strengthen guardrails” and urged the bank lobbyists not to stand in the way.Representative Patrick T. McHenry warned that proposed increases to the Federal Deposit Insurance Corporation $250,000 deposit insurance limit could have unintended consequences.Sarah Silbiger for The New York TimesPresident Biden has decried rollbacks in financial regulation passed by Republicans and Democrats under his predecessor, President Donald J. Trump. But he has thus far offered only a small set of concrete proposals for new legislation or executive action to stabilize the financial system in its current turmoil.Last week, Mr. Biden called for Congress to strengthen regulators’ ability to penalize executives of failed banks. His proposals would allow regulators to claw back compensation that executives of medium-sized banks received before their institutions went under, broadening a penalty that currently applies only to executives of large banks. They also would lower the legal threshold that regulators need to clear in order to ban those executives from working in other parts of the financial system.Administration officials are privately debating what else, if anything, Mr. Biden might ask Congress to do — or announce his administration will do unilaterally — to shore up the banking system.Karine Jean-Pierre, the White House press secretary, repeatedly dodged questions from reporters this week about any new proposals Mr. Biden was considering. “We don’t want to let Congress off the hook,” she said on Tuesday. “We want Congress to continue to — to certainly — to take action. And so, we’re going to call on them to do just that.”Mr. Biden has given just one speech on bank regulation since his administration joined the Fed in announcing a rescue plan for Silicon Valley Bank depositors earlier this month. He last addressed the issue on March 17, in a brief exchange with reporters before boarding Marine One at the White House.In that exchange, Mr. Biden was asked: “Are you confident the bank crisis has calmed down?”He replied: “Yes.”Lawmakers pressed Ms. Yellen on whether the administration supported proposals that some members of Congress have offered to make bank customers, whose deposits are only federally guaranteed up to $250,000, feel more confident that their money is safe.Ms. Yellen demurred when asked about proposals to raise the Federal Deposit Insurance Corporation’s cap on deposit insurance. Referring to recent moves to protect bank depositors, Ms. Yellen said during a speech at the A.B.A. gathering on Tuesday that “similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.”The Biden administration appears to have limited legal authority to unilaterally lift the deposit insurance cap, but financial sector analysts have speculated that the Treasury Department is studying whether it could utilize its Exchange Stabilization Fund, a pot of more than $200 billion of emergency money, to back bank deposits.“All she needs is approval from the president to tap into that basket,” Henrietta Treyz, director of economic policy research at Veda Partners, said of Ms. Yellen. “There are no other alternatives; there’s no chance of a bill passing Congress.”Ms. Yellen said on Wednesday that she was not considering such a move but rather would make case-by-case determinations of whether any banks facing runs pose a “systemic risk” to the economy.“I have not considered or discussed anything to do with blanket insurance or guarantees of all deposits,” Ms. Yellen said, adding that any changes to the deposit insurance limit would require legislation from Congress.Invoking the systemic-risk exception again would require approval from both the Fed and the F.D.I.C. At least one policymaker at the F.D.I.C. is skeptical that the exception should be applied to smaller banks, a person familiar with the situation said, which suggests that achieving consensus on such a move may not be a foregone conclusion.Uncertainty over any government plans to help further backstop banks loom large for the number of regional banks that have seen massive outflows of deposits and are exploring various ways to shore up their balance sheets. Both buyers and sellers are wary of striking a deal without full clarity on concessions the government might offer, two people familiar with the negotiations said.These include First Republic and Pacific Western Bank, which earlier Wednesday said, after tapping billions from an investment firm and the Federal Reserve, it was holding off on raising new capital in part because of depressed shares. Pacific Western has seen deposits fall 20 percent since the start of the year, while First Republic has lost nearly half.It is also unclear what concessions the F.D.I.C will offer as part of its efforts to sell the former Silicon Valley Bank. At least one bank, North Carolina-based First Citizens, has put forward an offer to buy that business, a person briefed on the matter said. The agency is now in the process of soliciting offers for various parts of SVB’s business including Silicon Valley Private Bank, an asset management firm, to discern whether it is more lucrative to sell the bank in pieces or as a whole.“We’ll need to wait and see what the bids are and what the least cost is to the deposit insurance fund,” said Julianne Breitbeil, a spokeswoman for the F.D.I.C, regarding any potential concessions the government plans to offer.The agency expects to issue an update on the sale process this weekend, Ms. Breitbeil said. More

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    Push to Insure Big Deposits Percolates on Capitol Hill

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    The government insures only deposits of less than $250,000, but there is precedent for lifting that cap amid turmoil. It could happen again.WASHINGTON — Lawmakers are looking for ways to resolve a major concern that threatens to keep the banking industry in turmoil: The federal government insures bank deposits only up to $250,000.Some members of Congress are looking for ways to boost that cap, at least temporarily, in order to stop depositors from pulling their money out of smaller institutions that have been at center of recent bank runs.Representative Ro Khanna, Democrat of California, and other lawmakers are in talks about introducing bipartisan legislation as early as this week that would temporarily increase the deposit cap on transaction accounts, which are used for activities like payroll, with an eye on smaller banks. Such a move would potentially reprise a playbook used during the 2008 financial crisis and authorized at the onset of the coronavirus pandemic in 2020 to prevent depositors from pulling their money out.Others, including Senator Elizabeth Warren, Democrat of Massachusetts, have suggested lifting the deposit cap altogether.Any broad expansion to deposit insurance could require action from Congress because of legal changes made after the 2008 financial crisis, unless government agencies can find a workaround. The White House has not taken a public position, instead emphasizing the tools it has already rolled out to address banking troubles.Many lawmakers have yet to solidify their positions, and some have openly opposed lifting the cap, so it is not clear that legislation adjusting it even temporarily would pass. While such a move could calm nervous depositors, it could have drawbacks, including removing a big disincentive for banks to take on too much risk.Still, Senate staff members from both parties have been in early conversations about whether it would make sense to resurrect some version of the previous guarantees for uninsured deposits, according to a person familiar with the talks.Even after two weeks of aggressive government action to shore up the banking system, jitters remain about its safety after high-profile bank failures. Some worry that depositors whose accounts exceed the $250,000 limit may pull their money from smaller banks that seem more likely to crash without a government rescue. That could drive people toward bigger banks that are perceived as more likely to have a government guarantee — spurring more industry concentration.“I’m concerned about the danger to regional banking and community banking in this country,” Mr. Khanna said in an interview. He noted that if regional banks lose deposits as people turn to giant banking institutions that are deemed too big to fail, it could make it harder to get loans and other financing in the middle of the country, where community and regional banks play a major role.“This should be deeply concerning, that our regional banks are losing deposits, and losing the ability to lend, he said.Representative Ro Khanna said broad temporary expansions to deposit insurance would likely require action from Congress.T.J. Kirkpatrick for The New York TimesIf passed, a temporary guarantee on transaction deposits over the $250,000 federal insurance cap would be the latest step in a sweeping government response to an unfolding banking disaster.Silicon Valley Bank’s failure on March 10 has rattled the banking system. The bank was ill prepared to contend with the Federal Reserve’s interest rate increases: It held a lot of long-term bonds that had declined in value as well as an outsize share of uninsured deposits, which tend to be withdrawn at the first sign of trouble.Still, its demise focused attention on other weak spots in finance. Signature Bank has also failed, and First Republic Bank has been imperiled by outflows of deposits and a plunging stock price. In Europe, the Swiss government had to engineer the takeover of Credit Suisse by its competitor UBS.The U.S. government has responded to the turmoil with a volley of action. On March 12 it announced that it would guarantee the big depositors at Silicon Valley Bank and Signature. The Federal Reserve announced that it would set up an emergency lending program to make sure that banks had a workaround to avoid recognizing big losses if they — as Silicon Valley Bank did — needed to raise cash to cover withdrawals.And on Sunday, the Fed announced that it was making its regular operations to keep dollar financing flowing around the world more frequent, to try to prevent problems from extending to financial markets.For now, the administration has stressed that it will use the tools it is already deploying to protect depositors and ensure a healthy regional and community banking system.“We will use the tools we have to support community banks,” Michael Kikukawa, a White House spokesman, said Monday. “Since our administration and the regulators took decisive action last weekend, we have seen deposits stabilize at regional banks throughout the country, and, in some cases, outflows have modestly reversed.”The midsize Bank Coalition of America has urged federal regulators to extend Federal Deposit Insurance Corporation protection to all deposits for the next two years, saying in a letter late last week that it would halt an “exodus” of deposits from smaller banks.“It would be prudent to take further action,” Mr. Khanna said.Yet not even all banking groups agree that such a step is necessary, especially given that a higher insurance cap might incite more regulation or lead to higher fees.The midsize Bank Coalition of America has urged federal regulators to extend F.D.I.C. insurance to all deposits for the next two years.Al Drago for The New York TimesLifting the deposit cap temporarily could send a signal that the problem is worse than it is, said Anne Balcer, senior executive vice president of the Independent Community Bankers of America, a trade group for small U.S. banks. She said many of its member banks were seeing an increase in deposits.“Right now, we’re in a phase of let’s exercise restraint,” she said.There is precedent for temporarily expanding deposit insurance. In March 2020, Congress’s first major coronavirus relief package authorized the F.D.I.C. to temporarily lift the insurance cap on deposits.And in 2008, as panic coursed across Wall Street at the outset of the global financial crisis, the F.D.I.C. created a program that allowed for unlimited deposit insurance for transaction accounts that chose to join the program in exchange for an added fee.Peter Conti-Brown, a financial historian and a legal scholar at the University of Pennsylvania, said the 2010 Dodd-Frank law ended the option for the agencies to temporarily insure larger transaction accounts the way they did in 2008.Now, he said, the regulators would either need congressional approval, or lawmakers would have to pass legislation to enable such a broad-based backstop for deposits. While regulators were able to step in and promise to protect depositors at Silicon Valley Bank and Signature Bank, that is because the collapse at those banks was deemed to have the potential to cause broad problems across the financial system.For smaller banks, where failures would be much less likely to have systemwide implications, that means that uninsured depositors might not receive the same kind of protection in a pinch.In a nod to those worries, Janet L. Yellen, the Treasury secretary, suggested on Tuesday that even smaller banks could warrant a “systemic” classification in some cases, allowing the agencies to backstop their deposits.“The steps we took were not focused on aiding specific banks or classes of banks,” Ms. Yellen said in a speech. “And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.”But the chances that such an approach — or another workaround that allows the government to take the action without passing legislation, such as tapping a pot of money at the Treasury called the Exchange Stabilization Fund — would be effective are not yet clear.Sheila Bair, who was chair of the F.D.I.C. from 2006 to 2011, said she thought that the Biden administration should propose legislation that would let the F.D.I.C. reconstitute a bigger deposit insurance program and use a “fast-track” legislative process to put it in place.While Dodd-Frank curbed the ability of the F.D.I.C. to restart the transaction account guarantee program on its own, it did provide for a streamlined process for future lawmakers to get it up and running again, she said.“I hope the president asks for it; I think it would settle things down pretty quickly,” Ms. Bair said in an interview. But some warned that enacting broad-based deposit insurance could set a dangerous precedent: signaling to bank managers that they can take risks unchecked, and leading to calls for more regulation to protect taxpayers from potential costs.Aaron Klein, a senior fellow in economic studies at the Brookings Institution, said he would oppose even a revamp of the 2008 deposit insurance because he thought it would be temporary in name only: It would reassert to big depositors that the government will come to the rescue.“If we think the market is going to believe that these things are temporary when they are constantly done in times of crisis,” he said, “then we’re deluding ourselves.”Alan Rappeport More

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    A Big Question for the Fed: What Went Wrong With Bank Oversight?

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    As the Federal Reserve reviews the failure of Silicon Valley Bank, and Congress prepares for hearings, bank oversight is getting a closer look.WASHINGTON — Jerome H. Powell is likely to face more than the typical questions about the Federal Reserve’s latest interest rate decision on Wednesday. The central bank chair will almost certainly be grilled about how and why his institution failed to stop problems at Silicon Valley Bank before it was too late.The collapse of Silicon Valley Bank, the largest bank failure since 2008, has prompted intense scrutiny of the Fed’s oversight as many wonder why the bank’s vulnerabilities were not promptly fixed.Many of the bank’s weaknesses seem, in hindsight, as if they should have been obvious to its regulators at the Fed. An outsize share of its deposits were over the $250,000 insurance limit, making depositors more likely to flee at the first sign of trouble and leaving the bank susceptible to runs.The bank had also grown rapidly, and its depositors were heavily concentrated in the volatile technology industry. It held a lot of long-term bonds, which lose market value when the Fed raises interest rates, as it has over the past year. Still, the bank had done little to protect itself against an increase in borrowing costs.Governors at the Fed Board in Washington allowed the bank to merge with a small bank in June 2021, after the first warning signs had surfaced and just months before Fed supervisors in San Francisco began to issue a volley of warnings about the company’s poor risk management. In 2022, the Fed repeatedly flagged problems to executives and barred the firm from growing through acquisition.But the Fed did not react decisively enough to prevent the bank’s problems from leading to its demise, a failure that has sent destabilizing jitters through the rest of the American financial system.Mr. Powell is likely to face several questions: What went wrong? Did examiners at the Federal Reserve Bank of San Francisco fail to flag risks aggressively enough? Did the Fed’s board fail to follow up on noted weaknesses? Or was the lapse indicative of a broader problem — that is, did existing rules and oversight make it difficult to quickly address important flaws?Some Democrats have blamed regulatory rollbacks put into effect by the Fed in 2019 for weakening the system, and have pointed a finger at Mr. Powell.Julia Nikhinson for The New York TimesThe Fed has already announced a review of the bank’s collapse, with the inquiry set to conclude by May 1.“The events surrounding Silicon Valley Bank demand a thorough, transparent and swift review by the Federal Reserve,” Mr. Powell said in a statement last week.Congress is also planning to dig into what went awry, with committees in both the Senate and House planning hearings next week on the recent bank collapses.Investors and experts in financial regulation have been racing to figure out what went wrong even before the conclusion of those inquiries. Silicon Valley Bank had a business model that made it unusually vulnerable to a wave of rapid withdrawals. Even so, if its demise is evidence of a blind spot in how banks are overseen, then weaknesses could be more broadly spread throughout the banking system.“The SVB failure has not only gotten people asking the question, ‘Gee, are other banks in similar enough circumstances that they could be in danger?’” said Daniel Tarullo, a former Fed governor who oversaw post-2008 regulation and who is now a professor at Harvard. “It’s also been a wake-up call to look at banks generally.”Politicians have already begun assigning blame. Some Democrats have blasted regulatory rollbacks passed in 2018, and put into effect by the Fed in 2019, for weakening the system, and they have pointed a finger at Mr. Powell for failing to stop them.At the same time, a few Republicans have tried to lay the blame firmly with the San Francisco Fed, arguing that the blowup shouldn’t necessarily lead to more onerous regulation.“There’s a lot, obviously, that we don’t know yet,” said Lev Menand, who studies money and banking at Columbia Law School.Understanding what happened at Silicon Valley Bank requires understanding how bank oversight works — and particularly how it has evolved since the late 2010s.Different American regulators oversee different banks, but the Federal Reserve has jurisdiction over large bank holding companies, state member banks, foreign banks operating in the United States and some regional banks.The Fed’s Board of Governors, which is made up of seven politically appointed officials, is responsible for shaping regulations and setting out the basic rules that govern bank supervision. But day-to-day monitoring of banks is carried out by supervisors at the Fed’s 12 regional banks.President Barack Obama with, to his left, Sen. Christopher Dodd and Representative Barney Frank in 2010, after signing the Dodd-Frank financial reform act.Doug Mills/The New York TimesBefore the 2008 financial crisis, those quasi-private regional branches had a lot of discretion when it came to bank oversight. But in the wake of that meltdown, the supervision came to be run more centrally out of Washington. The Dodd-Frank law carved out a new role for one of the Fed’s governors — vice chair for bank supervision — giving the central bank’s examiners around the country a more clear-cut and formal boss.The idea was to make bank oversight both stricter and more fail-safe. Dodd-Frank also ramped up capital and liquidity requirements, forcing many banks to police their risk and keep easy-to-tap money on hand, and it instituted regular stress tests that served as health checkups for the biggest banks.But by the time the Fed’s first official vice chair for supervision was confirmed in 2017, the regulatory pendulum had swung back in the opposite direction. Randal K. Quarles, a pick by President Donald J. Trump, came into office pledging to pare back bank rules that many Republicans, in particular, deemed too onerous.“After the first wave of reform, and with the benefit of experience and reflection, some refinements will undoubtedly be in order,” Mr. Quarles said at his confirmation hearing.Some of those refinements came straight from Congress. In 2018, Republicans and many Democrats passed a law that lightened regulations on small banks. But the law did more than just relieve community banks. It also lifted the floor at which many strict bank rules kicked in, to $250 billion in assets.Mr. Quarles pushed the relief even further. For instance, banks with between $250 billion and $700 billion in assets were allowed to opt out of counting unrealized losses — the change in the market value of older bonds — from their capital calculations. While that would not have mattered in SVB’s case, given that the bank was beneath the $250 billion threshold, some Fed officials at the time warned that it and other changes could leave the banking system more vulnerable.Lael Brainard, who was then a Fed governor and now directs the National Economic Council, warned in a dissent that “distress of even noncomplex large banking organizations generally manifests first in liquidity stress and quickly transmits contagion through the financial system.”Randal K. Quarles, who was picked by President Donald J. Trump and started at the Fed in 2017, came into office pledging to pare back bank rules that were by then deemed too onerous.Tom Williams/CQ Roll Call, via Associated PressOther Fed officials, including Mr. Powell, voted for the changes.It is unclear how much any of the adjustments mattered in the case of Silicon Valley Bank. The bank most likely would have faced a stress test earlier had those changes not gone into place. Still, those annual assessments have rarely tested for the interest rate risks that undid the firm.Some have cited another of Mr. Quarles’s changes as potentially more consequential: He tried to make everyday bank supervision more predictable, leaving less of it up to individual examiners.While Mr. Quarles has said he failed to change supervision much, people both within and outside the Fed system have suggested that his mere shift in emphasis may have mattered.“That ethos might have been why supervisors felt like they couldn’t do more here,” said Peter Conti-Brown, an expert in financial regulation and a Fed historian at the University of Pennsylvania.Mr. Quarles, who stepped down from his position in October 2021, pushed back on the contention that he had made changes to supervision that allowed weaknesses to grow at Silicon Valley Bank.“I gave up the reins as vice chair for supervision a year and a half ago,” he said.Fed supervisors began to flag Silicon Valley Bank’s problems in earnest in the fall of 2021, after the bank had grown and faced a more extensive review. That process resulted in six citations, often called “matters requiring attention,” which are meant to spur executives to act. Additional deficiencies were identified in early 2023, shortly before the failure.A critical question, said Mr. Menand, is “were the supervisors content to spot problems and wait for them to be remediated?”But he noted that when it came to “bringing out the big guns” — backing up stern warnings with legal enforcement — supervisors must, in many ways, rely on the Fed Board in Washington. If bank leadership thought the Board was unlikely to react to their deficiencies, it might have made them less keen to fix the problems.Banks often have issues flagged by their supervisors, and those concerns are not always immediately resolved. In a rating system that tests for capital planning, liquidity risk management and governance and controls, consistently only about half of large banking institutions score as “satisfactory” across all three.But in the wake of Silicon Valley Bank’s collapse, how bank oversight is performed at the Fed could be in for some changes. Michael Barr, who President Biden appointed as the Fed’s vice chair for supervision, was carrying out a “holistic review” of bank oversight even before the failures. Either that or the review of what happened at SVB is now more likely to end in tighter controls, particularly at large regional banks.“There’s a lot of buck-passing,” said Mr. Conti-Brown. “I think it was likely a joint failure, and that’s part of the design of the system.” More

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    U.S. Is Ready to Protect Smaller Banks if Necessary, Yellen Says

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    The Treasury secretary pledged that the Biden administration would take additional steps as needed to support the banking system.Treasury Secretary Janet L. Yellen said pressures on the nation’s banking system were “stabilizing” in remarks to the American Bankers Association.Pete Marovich for The New York TimesWASHINGTON — Treasury Secretary Janet L. Yellen expressed confidence in the nation’s banks on Tuesday but said she was prepared to take additional action to safeguard smaller financial institutions as the Biden administration and federal regulators worked to contain fallout from fears over the stability of the banking system.Ms. Yellen, seeking to calm nerves as the U.S. financial system faces its worst turmoil in more than a decade, said the steps the administration and federal regulators had taken so far had helped restore confidence. But policymakers were focused on making sure that the broader banking system remained secure, she said.“Our intervention was necessary to protect the broader U.S. banking system,” Ms. Yellen said in remarks before the American Bankers Association, the industry’s leading lobbying group. “And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.”She added: “The situation is stabilizing. And the U.S. banking system remains sound.”However, Ms. Yellen also underscored the gravity of the current situation. She said the stresses to the banking system, while not as dire as the 2008 financial meltdown, still constituted a “crisis” and pointed to the risk of bank runs spreading.“This is different than 2008; 2008 was a solvency crisis,” Ms. Yellen said. “Rather what we’re seeing are contagious bank runs.”In response to a question from Rob Nichols, the chief executive of the American Bankers Association, Ms. Yellen said she did not want to “speculate” about what regulatory changes might be necessary to prevent a similar situation from recurring.“There’s time to evaluate whether some adjustments are necessary in supervision and regulation to address the root causes of the crisis,” she said. “What I’m focused on is stabilizing our system and restoring the confidence of depositors.”She spoke as government officials contemplated additional options to stem the flow of deposits out of small and medium-size banks, and as concerns grew that more would need to be done.Ms. Yellen said recent federal actions after the failure of Silicon Valley Bank and Signature Bank this month were intended to show that the Biden administration was dedicated to protecting the integrity of the system and ensuring that deposits were secure.In the past 10 days, federal regulators have used an emergency measure to guarantee the deposits of Silicon Valley Bank and Signature Bank, initiated a new Federal Reserve program to make sure other banks can secure funds to meet the needs of their depositors and coordinated with 11 big banks that deposited $30 billion into First Republic, a wobbly regional bank..css-1v2n82w{max-width:600px;width:calc(100% – 40px);margin-top:20px;margin-bottom:25px;height:auto;margin-left:auto;margin-right:auto;font-family:nyt-franklin;color:var(–color-content-secondary,#363636);}@media only screen and (max-width:480px){.css-1v2n82w{margin-left:20px;margin-right:20px;}}@media only screen and (min-width:1024px){.css-1v2n82w{width:600px;}}.css-161d8zr{width:40px;margin-bottom:18px;text-align:left;margin-left:0;color:var(–color-content-primary,#121212);border:1px solid var(–color-content-primary,#121212);}@media only screen and (max-width:480px){.css-161d8zr{width:30px;margin-bottom:15px;}}.css-tjtq43{line-height:25px;}@media only screen and (max-width:480px){.css-tjtq43{line-height:24px;}}.css-x1k33h{font-family:nyt-cheltenham;font-size:19px;font-weight:700;line-height:25px;}.css-1hvpcve{font-size:17px;font-weight:300;line-height:25px;}.css-1hvpcve em{font-style:italic;}.css-1hvpcve strong{font-weight:bold;}.css-1hvpcve a{font-weight:500;color:var(–color-content-secondary,#363636);}.css-1c013uz{margin-top:18px;margin-bottom:22px;}@media only screen and (max-width:480px){.css-1c013uz{font-size:14px;margin-top:15px;margin-bottom:20px;}}.css-1c013uz a{color:var(–color-signal-editorial,#326891);-webkit-text-decoration:underline;text-decoration:underline;font-weight:500;font-size:16px;}@media only screen and (max-width:480px){.css-1c013uz a{font-size:13px;}}.css-1c013uz a:hover{-webkit-text-decoration:none;text-decoration:none;}How Times reporters cover politics. We rely on our journalists to be independent observers. So while Times staff members may vote, they are not allowed to endorse or campaign for candidates or political causes. This includes participating in marches or rallies in support of a movement or giving money to, or raising money for, any political candidate or election cause.Learn more about our process.“The situation demanded a swift response,” Ms. Yellen said. “In the days that followed, the federal government delivered just that: decisive and forceful actions to strengthen public confidence in the U.S. banking system and protect the American economy.”Despite those efforts, the Fed’s campaign to raise interest rates to tame inflation has exposed weaknesses in the balance sheets of regional banks, rattling investors and raising fears that deposits are not safe.Ms. Yellen said the financial system was far stronger than it was 15 years ago but also called for an examination of how the recent bank failures occurred.“In the coming weeks, it will be vital for us to get a full accounting of exactly what happened in these bank failures,” she said. “We will need to re-examine our current regulatory and supervisory regimes and consider whether they are appropriate for the risks that banks face today.”The Federal Reserve, which is the primary regulator for banks, is undertaking a review of what happened with Silicon Valley Bank as well as looking more broadly at supervision and regulation.The uncertainty about regional banks has also led to concerns that the industry will further consolidate among big banks.Ms. Yellen made clear on Tuesday that banks of all sizes are important, highlighting how smaller banks have close ties to communities and bring competition to the system.“Large banks play an important role in our economy, but so do small and midsized banks,” she said. “These banks are heavily engaged in traditional banking services that provide vital credit and financial support to families and small businesses.”The Treasury secretary added that the fortunes of the U.S. banking system and its economy were inextricably tied.“You should rest assured that we will remain vigilant,” she said. More