The Federal Reserve and Federal Deposit Insurance Corp issued detailed reports on Friday on what went wrong and where their supervisors came up short in the run-up to the two biggest bank failures since the Great Financial Crisis.
Below are key details from the government's post-mortems, which underscore management failings at Silicon Valley Bank and Signature Bank and too-slow, too-soft responses from regulators.
MANAGEMENT FAILURES
* SVB was "acutely exposed" to risks from rising interest rates and slowing activity in the technology sector in ways that senior leaders and its board of directors did not appreciate. The Santa Clara, California-based bank failed its own internal liquidity stress tests, the Fed said in its report.
* In 2022, SVB failed to test its capacity to borrow at the discount window and did not have appropriate collateral and operational arrangements in place to obtain contingency funding, the U.S. central bank said.
* The Fed placed SVB on a list of banks with the highest ratio of unrealized losses relative to common equity tier 1 capital after a June 2022 special risk report.
*Signature failed to understand the risk of its association with and reliance on crypto industry deposits. Signature saw $17.6 billion in deposit outflows last year, with digital asset-related deposits representing about 62% of that, the FDIC said.
*The FDIC was considering pursuing two new enforcement actions related to weaknesses in its requirements to prevent money laundering and abide by sanctions and another related to longstanding risk management weaknesses, the regulator said.
* The FDIC said it had issued a letter to Signature's board of directors on March 11, notifying them it would pursue a formal enforcement action against the bank due to management's inadequate response to its "precipitous decline."
TOO LAX, TOO LATE
* The culture at the Fed changed following the 2018 legislative rollback of banking regulations. This shift contributed to more lax supervision, staff said in interviews, citing pressure to reduce burdens on banks and provide more proof for their conclusions.
* The Fed's judgments of SVB were "not always appropriate" given that bank's weaknesses. In one case, SVB's governance and controls were downgraded to deficient only in August 2022 despite earlier signs that management and board oversight needed improvements.
* Fed supervisors discussed conducting an interest-rate risk review of SVB during 2022 but decided to prioritize other exams and defer it to the third quarter of 2023.
* Fed officials initially recommended denying SVB's 2022 request to make an investment in its London subsidiary due to supervisory issues, but ultimately dropped objections.
*The FDIC's communication of exam results to Signature's board was often not timely, and in some cases significantly delayed.
*The FDIC could have lowered Signature management's rating sooner due to emerging weaknesses in corporate governance spotted beginning in 2021, it said.
INADEQUATE GOVERNMENT RESOURCES
* The Fed's supervision headcount declined by 3% from 2016 to 2022, even as banking sector assets grew by 37%.
* The level of Fed resources dedicated to its regional bank oversight "proved insufficient." A single examiner was responsible for reviewing the bank's interest-rate risk and investment portfolio, and in some cases, would also review liquidity and model risk management during a two-to-three-week timeframe.
* From 2017 to 2023, the FDIC was not able to adequately staff an exam team dedicated to Signature.
* Exam staff shortages, particularly in the New York region, are a "mission-critical risk", the FDIC said. An average of 40% of its New York region large bank supervisory roles have been vacant or filled by temporary workers since 2020.
