FOR IMMEDIATE RELEASE
April 28, 2023
CONTACT
Carter Dougherty
carter@ourfinancialsecurity.org
(202) 251-6700
Fed Report Underscores Need for Regulatory Policy Shift and Further Inquiry
Washington, D.C. – The report by the Federal Reserve on the collapse of Silicon Valley Bank only highlights the need for federal regulators to tighten oversight of banks as soon as possible to both remedy the errors of the past, and to forestall further financial contagion. At the same time, a fully independent probe of the Fed’s actions, including its leadership, remains vital.
“It is long past time to roll back the dangerous deregulation of mid-sized banks under the last administration to the greatest extent possible and also take steps to strengthen the largest banks so this crisis does not worsen,” said Alexa Philo, senior policy analyst at Americans for Financial Reform Education Fund, and a former Fed examiner. “While the repeal of S.2155 would be ideal, the Fed still has significant leeway to take actions that will safeguard the stability of the financial system.”
In a new policy memo, AFR-EF has outlined areas in which the Fed can immediately make regulatory changes, under existing authorities, that would contribute to financial stability at a moment of considerable stress. Those include changes to the Fed’s implementation of S.2155, tough new capital rules on megabanks, changes to revive the Volcker Rule, stronger supervision of securities portfolios, closing anti-tying loopholes, and strengthening the bank merger review framework.
The Barr report does not address the broader governance issues plaguing the Fed, especially between the expectations set by the Board on the Reserve Banks and how this ultimately affected supervision.
Fed Chair Jerome Powell and former Vice Chair Randal Quarles’ extensive record – documented in an AFR-EF Fact Sheet – supporting deregulation and lighter supervision, certainly had a chilling effect on supervisors and examiners. But questions remain about the role and structure of the San Francisco Fed and other Reserve Banks. An independent investigation must also evaluate the role of bankers on Reserve Bank boards.
“The report is notably light on information about what role senior Fed leadership played in causing this banking crisis,” Philo added. “Powell supported a light-touch approach to banking regulation and supervision before he even became chair, and Quarles handled these matters directly. The report relays only the vague impressions of lower-level officials about leadership in Washington, without any specificity concerning what those leaders said and did. Accountability must start at the top, not the bottom.”
Additionally, the report found that incentive compensation arrangements and practices at Silicon Valley Bank “encouraged excessive risk taking to maximize short-term financial metrics.” In fact, Fed examiners had identified “major weaknesses” in its incentive compensation program in 2022.
“Executives received cash bonuses on the same day SVB failed even though Fed examiners had flagged major weaknesses in incentive compensation,” said Natalia Renta, senior policy counsel for corporate governance and power at AFR-EF. “Enough is enough. The Fed and the five other relevant agencies must act swiftly to finally complete long-overdue rules to ensure that compensation does not amplify risks.”
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