From: lessgovt@gmail.com   
      
   How Bank Oversight Failed: The Economy Changed, Regulators Didn’t   
   By Ackerman, Au-Yeung and Miao, March 24, 2023, WSJ   
   On March 8, Silicon Valley Bank and Signature Bank were both, according to   
   public disclosures, “well capitalized,” the optimal level of health by   
   federal regulatory standards.   
      
   Days later, both failed.   
      
   “The question we were all asking ourselves over that first week was, ‘How   
   did this happen?’” Federal Reserve Chair Jerome Powell said Wednesday.   
      
   Interviews with past and current regulators and examiners, bankers and people   
   close to the failed banks point to a combination of fast shifts in the economy   
   plus regulators who adjusted only slowly, if at all, to those changes. Even   
   when supervisors    
   spotted problems, they didn’t move quickly or decisively enough to stop them   
   from snowballing into a crisis.   
      
   As interest rates surged after years of quiescence, regulators didn’t fully   
   anticipate the hit banks would take to the value of their bondholdings. The   
   Fed as late as mid-2021 expected the era of ultralow rates to continue. Not   
   until late 2022, when    
   rates had already risen substantially, did regulators warn SVB that its   
   modeling of interest-rate risk was inadequate.   
      
   A second factor was failure to appreciate the danger in bank dependence on   
   deposits above the $250,000 federal insurance limit. Banks had come to depend   
   more on such deposits. Regulators acknowledge they didn’t stress such a   
   concern because the big    
   deposits were from SVB’s and Signature’s core customers, who, it was   
   thought, would stick around.   
      
   In fact, deposits fled far faster than had ever happened before, aided both by   
   social media-fueled fear and by technology that allowed people to move vast   
   sums with a few taps on a smartphone.   
      
   SVB showed “classic red flags for bank examination 101,” said Aaron Klein,   
   a senior fellow at the Brookings Institution. “Finding problems late and   
   moving slowly is a recipe for supervisory failure. It sure looks like that’s   
   what happened here.”   
      
   A third factor was that the nature of supervision itself had changed, becoming   
   more bureaucratic and process-oriented—just when banking was moving faster.   
   Examiners raised problems with SVB but didn’t escalate their concerns to   
   formal enforcement    
   actions before a run began.   
      
   “The supervisory process has not evolved for rapid decision making. It is   
   focused on consistency over speed,” said Eric Rosengren, former president of   
   the Federal Reserve Bank of Boston. “In a fast-moving situation, the system   
   is not as well-   
   designed to force change quickly.”   
      
   Banking regulators will spend months, if not years, getting to the bottom of   
   what happened. The Fed, FDIC and Treasury have for now limited the contagion   
   by guaranteeing all SVB and Signature deposits and extending additional   
   support to all banks. Mr.    
   Powell has announced an internal Fed review of what went wrong, to report by   
   May. Lawmakers plan to hold hearings beginning next week.   
      
   Representatives for SVB, now under FDIC control, and its former chief   
   executive declined to comment. A spokesman for New York Community Bancorp,   
   whose subsidiary purchased Signature’s assets, declined to comment.   
      
   SVB was a smaller bank that grew rapidly in the past several years along with   
   its tech clientele. Its principal regulators were the Fed in Washington, the   
   Federal Reserve Bank of San Francisco and California’s Department of   
   Financial Protection and    
   Innovation.   
      
   Examiners had found issues at SVB in the past. In 2019, the Fed alerted   
   management to problems with the bank’s risk controls. Last summer, the Fed   
   warned about flaws in liquidity and risk management and governance, according   
   to people familiar with the    
   matter. Ultimately, SVB was placed in a “4M” restriction, which meant it   
   couldn’t make acquisitions, one of the people said.   
      
   The alerts came in the form of  “matters requiring attention” and   
   “matters requiring immediate attention”—in effect, supervisory memos   
   urging but not compelling action.   
      
   By 2022, the key issue for both the economy and banks was inflation, which   
   jumped above 5% after decades around 2%. A Fed that until mid-2021 signaled it   
   would hold rates near zero for years has, in the past 12 months, raised them   
   at the sharpest pace    
   since the early 1980s.   
      
   Rising rates cause bond prices to fall, especially bonds that don’t mature   
   for many years, which some banks, including SVB, had favored for their   
   additional yield. By the end of 2022, that left such banks with big unrealized   
   losses, something the FDIC    
   began warning about in the second half of the year.   
      
   A fall in the value of banks’ bondholdings could in theory reduce their   
   capital, the cushion between assets and liabilities that absorbs losses. In   
   1991, Congress instructed regulators to devise a formula for measuring the   
   effect of interest rates on    
   capital.   
      
   But in 1996 the Fed, FDIC and Office of the Comptroller of the Currency said   
   that the “burdens, costs, and potential incentives of implementing a   
   standardized measure and explicit capital treatment currently outweigh the   
   potential benefits.” Instead,    
   they would “work with the industry to encourage efforts to improve risk   
   measurement techniques.” The effect of changes in interest rates is one of   
   the things bank examiners are instructed to look at.   
      
   The Fed didn’t prioritize interest-rate risk in some of its recent   
   regulatory exercises. The stress tests it administers to large financial   
   institutions haven’t considered a scenario of high inflation and interest   
   rates in years.   
      
   This year, the Fed in its stress tests asked banks to show how they would be   
   affected by a rise in inflation. But that scenario was released after   
   inflation had hit its recent peak, and the results wouldn’t have had any   
   practical impact on banks’    
   operations.   
      
   By 2022, SVB was large enough to be assigned its own Fed supervisory team,   
   according to a former Fed examiner. As the bank approached $250 billion in   
   assets, bank staff scrambled to prepare for the heightened regulatory scrutiny   
   that this threshold would    
   entail, according to people familiar with the matter. Meetings with Fed   
   examiners became more intense, said a former employee who worked in risk   
   management.   
      
      
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