Assessing Supervisory Performance: Fed and NYDFS Respond to March’s Big Bank Failures

Internal reviews reveal weaknesses in supervision of Signature Bank and Silicon Valley Bank

Internal reviews of the supervision of Signature Bank and Silicon Valley Bank have been released, showing weaknesses on the part of the banks’ regulators as well as management. Bank regulators in the United States have turned from introspection to confession after the high-profile bank failures in March.

The NYDFS report on Signature Bank supervision

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 banks closed within days of each other, with California regulators shuttering SVB on March 10 and the NYDFS moving against Signature Bank on March 12.

The string of failures set off shockwaves serious enough that U.S. President Joe Biden felt the need to tweet a response.

The Federal Reserve Board’s review of 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. 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.”

Risk management issues at Signature Bank

The NYDFS noted that crypto-friendly Signature Bank had also experienced rapid growth in the years immediately before its closure. Like SVB, it had a high proportion of deposits that were not insured by the Federal Deposit Insurance Corporation (FDIC), which caps its coverage at $250,000 per account.

“The Bank’s growth outpaced the development of its risk control framework,” the New York regulators wrote. Risk management issues were identified at Signature Bank in annual reviews in 2018 and 2019, but they were only partially addressed.

Supervision problems at NYDFS

There were problems relating to supervision as well. “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.

“[The NY]DFS will consider 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.”