Report faults Fed staff for epic failure of Silicon Valley Bank
By Matt Egan, CNN
New York (CNN) — Staffers at the Federal Reserve knew or should have known about the severe trouble mounting at Silicon Valley Bank, but failed to act before the lender’s implosion set off a mini-banking crisis in 2023, according to an independent review revealed on Friday.
The preliminary report, as detailed by Fed officials, adds to the blame game over the second-largest banking failure in American history, an event that prompted Fed and Biden administration officials to scramble to put out the fire before it spread.
In a speech on Friday, Michelle Bowman, the top banking regulator at the Fed, said the independent report found that Silicon Valley Bank (SVB) “failed as the result of confluence of vulnerabilities” that included mounting losses on securities, a deposit base that was prone to bank runs and a lack of readiness to borrow from a critical Fed program.
“Our supervisory staff knew, or should have known, about these vulnerabilities as early as March 2022,” Bowman said, summarizing the preliminary findings.
Even though Fed officials knew or should have known about the trouble, Bowman said staffers failed to take “prompt and decisive action” that could have prevented the collapse.
“One significant factor contributing to supervisory inaction was a long-standing culture of risk aversion,” said Bowman, whom President Donald Trump nominated last year to become the Fed’s vice chair for supervision. “Staff believed it was personally safer to take no action unless they were certain the action was exactly right.”
Bowman added that the cultural problems were compounded by a “lack of clarity” over decision-making among supervisory staffers.
“This review is not about assigning blame. Instead, it is about learning lessons from the past to avoid repeating them in the future,” Bowman said.
The Fed did not release a copy of the report, which was conducted by Starling Advisory Group.
The report dismisses theories that the downfall of SVB was accelerated by rumors spreading on social media at the time.
Consulting firm Charles River Associates, hired by Starling to analyze this theory, found that “social media did not trigger the bank run at SVB, and there was no evidence that social media accelerated the run,” Bowman said.
Erich Hoefer, Starling’s co-founder and chief operating officer, said in an email to CNN that the firm is “unable” to share the report “unless and until authorized by our client.”
By pointing the finger at Fed regulators, Bowman’s overview of the preliminary findings highlight failures that would have occurred under her predecessor, Michael Barr.
Barr, a Biden-nominated official, served as the Fed’s top regulator between July 2022 and early last year. After stepping down as vice chair for supervision, Barr remained on the Fed’s powerful Board of Governors and still votes on interest rate decisions.
CNN has reached out to Barr and Fed Governor Jerome Powell, who was chair at the time of the Silicon Valley Bank collapse, for comment.
Trump blasted Fed officials this week for raising interest rates for the first time in three years. He praised Fed Chairman Kevin Warsh, his handpicked Fed chief, but condemned the “very hostile” and “very political” board.
Three former Fed officials told CNN on Friday that it’s possible Trump could use the new report on Silicon Valley Bank to try to force out Barr, opening up a vacancy for a Trump-aligned nominee.
“It’s hard to say for sure, but there’s no getting around that suspicion,” especially after Trump’s recent criticism of the Fed board, Benson Durham, a former Fed official, told CNN.
The White House did not respond to a request for comment on the new report nor on concerns that Trump could try to fire Barr.
Under the Federal Reserve Act of 1913, presidents can only remove members of the Fed board “for cause.”
While the Starling report spotlighted failures under Barr’s watch, Bowman indicated the review absolved his predecessor, Randal Quarles.
Delays in Fed oversight of SVB “were not caused” by “any directive or suggestion” from “the former Vice Chair for Supervision,” Bowman said, referring to Quarles.
“In fact, the former Vice Chair had stepped down in October 2021, well before 2022, when SVB’s vulnerabilities became most apparent,” Bowman said.
In July, Sen. Elizabeth Warren, the top Democrat on the Senate Banking Committee, called for an independent investigation into Bowman’s decision to hire Starling to conduct the SVB review because of the firm’s connections to Quarles.
Quarles is listed as the “study chair” on a report Starling published earlier this year on bank supervision. Gary Cohn, the former Goldman Sachs executive who served as a top White House economist during Trump’s first term, is also listed on Starling’s advisory board.
Notably, Bowman said the Starling report found the Fed regulatory problems were not caused by a bipartisan 2018 rollback of bank regulation that freed large regional banks like SVB from the toughest oversight.
Warren said in a statement on Friday that Bowman has “wasted taxpayer resources to hire what appears to be her partisan friends” on a third-party “autopsy that magically and conveniently exonerates her and President Trump of any wrongdoing.”
“It’s an embarrassing attempt to rewrite history designed to pave the way for more dangerous deregulation that will lead to the next Silicon Valley Bank disaster,” Warren said.
The-CNN-Wire
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