Bank regulators in the United States have turned from introspection to confession after the high-profile bank failures in March. The New York Department of Financial Services (NYDFS) published its internal review of Signature Bank supervision on April 28, the same day the U.S. Federal Reserve Board released its review of the handling of Silicon Valley Bank (SVB).
The banks closed within days of each other, with California regulators shuttering SVB on March 10 and the NYDFS moving against Signature Bank on March 12. Crypto-friendly Silvergate Bank had preceded them, announcing its voluntary liquidation on March 8 and setting off runs on the banks. The string of failures set off shockwaves serious enough that U.S. President Joe Biden felt the need to tweet a response.
The Fed review started with findings that had been noted by commentators: SVB’s management failed to manage its risks, and supervisors “did not fully appreciate the extent of the vulnerabilities” of the bank as it “grew in size and complexity,” even though “SVB’s foundational problems were widespread and well-known.”
Furthermore, supervisors failed to act quickly enough on the vulnerabilities they did identify. Annual capital, asset quality, management, earnings, liquidity and sensitivity to market risk (CAMELS) exams had uncovered deficiencies in 2021 and 2022, but changes in the supervisory team and the bank’s rapid growth got in the way of handling them, and:
“The supervisory approach at Silicon Valley Bank was too deliberative and focused on the continued accumulation of supporting evidence in a consensus-driven environment.”
Regulatory easing due to the passage of the Economic Growth, Regulatory Relief, and Consumer Protection Act in 2019 led to a “tailoring approach” to regulating many large banks, including SVB. Supervisory policy was changed at the same time to place greater emphasis on due process, slowing down regulatory action, according to the report.
The Fed conceded, however, “While higher supervisory and regulatory requirements may not have prevented the firm’s failure, they would likely have bolstered the resilience of Silicon Valley Bank.”
— NYDFS (@NYDFS) April 28, 2023
The NYDFS noted that crypto-friendly Signature Bank had also experienced rapid growth in the years immediately before its closure. Like SVB, it had a high proportion of deposits that were not insured by the Federal Deposit Insurance Corporation (FDIC), which caps its coverage at $250,000 per account.
“The Bank’s growth outpaced the development of its risk control framework,” the New York regulators wrote. Risk management issues were identified at Signature Bank in annual reviews in 2018 and 2019, but they were only partially addressed.
There were problems relating to supervision as well. “Internal staff constraints limited DFS’s ability to staff examinations adequately,” the report said. Also, “DFS’s internal processes need clearer guidelines for when examiners need to escalate regulatory concerns or instances in which a bank fails to remediate findings in a timely fashion.” In addition, the mechanisms of the review process within the NYDFS were “cumbersome” and lacked deadlines. In addition:
“[The NY]DFS will consider whether banks need to conduct table-top exercises demonstrating their operational readiness to collect and produce accurate financial data at a rapid pace and in a stress scenario.”
The NYDFS presented its decision to close down Signature Bank as the culmination of a process that began with the bankruptcy of crypto exchange FTX in November. Due to its crypto-friendly reputation, the NYDFS began requiring Signature to “provide periodic liquidity updates,” which were made daily in January and switched to monitoring calls on March 8.
The NYDFS worked with federal regulators over the weekend of March 11-12 to assess Signature Bank’s viability after it “narrowly survived the immediate deposit run” of the preceding week. Regulators decided on March 12 that the bank’s liquidity was inadequate and its reporting was unreliable. So they took possession of the bank and appointed the FDIC as receiver.
The instability in the banking sector did not stop with Signature Bank’s closing. Swiss bank Credit Suisse was subject to a rescue buyout by UBS a week later. The U.S. bank First Republic, which also was characterized by a high volume of uninsured deposits, began to decline in share price in March as well. On April 28, its share price fell 43.3% in one day to $3.51, after trading at $119.74 on March 1, leading to speculation of an FDIC takeover of it as well.