Reforming Bank Supervision: The Federal Reserve's Response to Financial Failures

Nearly a year has passed since Silicon Valley Bank (SVB) triggered a series of bank failures in the United States, prompting a substantial shift in the Federal Reserve Board's approach to supervising mid-sized and large financial institutions. Michael Barr, the agency's vice chair for supervision, detailed these alterations during a speech at the Columbia Law School Banking Conference in New York City.

Barr emphasized that since March 2023, the Fed has undertaken a comprehensive overhaul of its supervisory procedures to swiftly and robustly address emerging risks that mid-sized and large banks may have previously overlooked or underestimated. This proactive stance, he noted, is a direct response to supervisory deficiencies that contributed to the collapse of SVB, Signature Bank, and First Republic Bank in the preceding year.

In light of these bank failures, Barr revealed that the Fed has significantly increased its issuance of supervisory findings and enforcement actions. Specifically, since SVB's collapse, the Fed has issued 19 enforcement actions against banks, compared to just 13 in the 14 months leading up to March 2023. This heightened level of enforcement signals a more assertive regulatory approach aimed at ensuring compliance and mitigating systemic risks.

Moreover, Barr highlighted a notable shift in the scale and scope of enforcement actions, particularly involving larger institutions. For instance, the Fed imposed a $67.8 million fine against Wells Fargo in late March 2023 for oversight failures related to sanctions violations. Subsequently, in July, the agency levied a staggering $268.5 million fine against UBS for persistent risk management failures inherited from Credit Suisse, further compounded by the ripple effects of the U.S. bank failures.

Barr reiterated the Fed's supervisory mandate, stating, “The goal of supervision is not to prevent all bank failures. In a market economy, poorly run firms should go out of business." He added, "Similarly, the goal of supervision is not to tell a bank that its business model may not work; the market will do that." He emphasized the importance of guiding banks to address weaknesses in risk management, compliance, and capital adequacy.

One significant aspect of the Fed's revised approach is the management of fast-growing, mid-sized banks like SVB, First Republic, and Signature. Barr stated, "[F]or large and more complex regional banking organizations, including firms that are growing rapidly, we are assessing such a firm’s condition, strategy, and risk management more frequently and deepening our supervisory interactions." He added that smaller and less complex firms will see little difference from the current state.

Furthermore, Barr stressed the importance of forward-looking supervision, urging supervisors to anticipate and address emerging risks proactively. He acknowledged weaknesses in the Fed's response to the SVB collapse, particularly concerning delays in acquiring evidence of underlying issues. Moving forward, Barr emphasized the need for supervisors to be more forward-thinking and responsive to negative industry trends, leveraging such insights to inform their supervisory assessments and drive meaningful action.

In summary, the Fed's revamped supervisory approach reflects its commitment to bolstering oversight practices, mitigating systemic risks, and ensuring the stability and resilience of the banking sector in the face of evolving challenges. These changes signify a shift towards a more proactive and rigorous regulatory stance, aimed at safeguarding financial stability and promoting sound risk management practices across the banking industry.

By fLEXI tEAM