- Key insight: The Federal Reserve's external review of the 2023 Silicon Valley Bank failure is starting to yield results that are shaping potential policy reforms.
- Expert quote: "The review revealed that too many staff members feel it is personally safer to take no action than to risk taking the wrong action." —Federal Reserve Vice Chair for Supervision Michelle Bowman
- Forward look: Bowman said the report is the first in what will be a "series" from the Starling Trust Sciences.
With the early findings from the Federal Reserve's external review of the Silicon Valley Bank failure in hand, the Fed's top regulator is calling for policy changes within the central bank.
In a Friday morning speech, Fed Vice Chair for Supervision Michelle Bowman said she had received a report on preliminary findings from Starling Trust Sciences, the firm she hired to
In her remarks, Bowman said the report — which has not been released to the public — outlines issues of
"These reports will identify any supervisory issue or concern in which an examiner was uncertain — about whether the standard for taking supervisory action was met, or whether such action might be inconsistent with the expectations of Board or Reserve Bank leadership," Bowman said. "This accomplishes two goals. First, it empowers our examiners to escalate concerns without fear, and it gives leadership real-time visibility into where our teams need clearer guidance."
The Starling Report, Bowman said, notes that supervisors in the Fed system feel "personally safer to take no action unless they were certain the action was exactly right" — a disposition she described as a "long-standing culture of risk aversion."
Like several other takeaways from the report, the cultural issues and unwillingness to elevate issues had been spelled out by previous official postmortems, including one
Other topics the Starling report has in common with its predecessors is a focus on the role of unrealized losses and uninsured deposits on the bank's balance sheet, the year-long paper of identified issues at the bank and the inability of supervisors to take prompt action to address those issues.
Still, Bowman said the report shed light on important aspects of the Fed's oversight of the Santa Clara, California, bank and its failure in March 2023 — the third biggest bank failure in U.S. history behind only Washington Mutual in 2008.
Specifically, she noted that the report found no connection between the failure and
"In fact," Bowman said, "the former Vice Chair [Quarles] had stepped down in October 2021, well before 2022, when SVB's vulnerabilities became most apparent."
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She added that the Starling report also refuted claims that social media drove the bank run that ultimately felled Silicon Valley Bank.
"In fact, Charles River Associates analyzed this claim at Starling's request and concluded that social media did not trigger the bank run at SVB, and there was no evidence that social media accelerated the run," she said. "Among other things, they found that 96% of the social media chatter regarding the run appeared after SVB's failure was inevitable."
Bowman did not release the full text of Starling's report, which is hundreds of pages long and comes with hundreds of more pages of appendices and source materials. She also did not commit to making the report public in the future.
In an interview with American Banker, Starling founder Stephen J. Scott said the report he submitted was the first of three rounds of fact findings that he plans to submit by early next year. While the report compiled the facts into a narrative, he said conclusions and recommendations would not be rendered until later phases.
Still, Scott — who said he was not authorized to release the report with the Fed's permission — described Bowman's summary of the findings as "very fair."
Scott said much of his effort in this initial report was aimed at substantiating the prevailing narratives around the failure and its causes. For that reason, he said, it should not be surprising that his preliminary findings match what is already known.
"This is very much a constructive undertaking," he said. "It's not meant to be a critical undertaking, and it is absolutely not aimed at Monday morning quarterbacking or casting aspersions or assigning blame to particular individuals. It's rather asking, 'why did the system not perform as intended, and how do we fix that?'"
Part of that exercise, he said, is removing from the conversation factors that had little to no bearing on the outcome for Silicon Valley Bank. He noted that focusing on the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 or social media activity when they did not contribute to the bank's demise could result in reforms that do not address the issue at hand.
Scott said one contributing factor that needs to be addressed is the culture and structure of supervision, noting that the existing reports do not fully capture that issue.
"There's a political narrative that stems from a slanted reading of the Barr report, that VCS Quarrels imposed a culture that stymied effective supervision. That's just simply not borne out by our conversations with staff," Scott said. "What comes through very clearly in our conversations with staff across the system is there is a very, very clear divorcing of responsibility, authority, and accountability."
Margaret Tahyar, co-head of the financial institutions practice at the law firm Davis-Polk, said the review has an important role in ensuring that the correct policy changes are being made in response to Silicon Valley Bank's failure.
"If we're going to make changes in regulations or in supervisory culture, we have to have an accurate sense of the root cause; otherwise, we won't know how to make the right changes," she said. "If you think of it in medical terms, you need to diagnose the right disease to find the treatment."
Tahyar, who has viewed a copy of the preliminary report, said those in and around the banking industry should withhold judgement about its conclusions until they see the full text.
"The thing to know is: it's preliminary," she said. "There's more to come, and that is much more evident in reading the report than what is in [Bowman's] speech."
Jeremy Kress, a University of Michigan law professor and former Fed attorney, said it is impossible to judge the report without seeing it, but noted that the takeaways outlined in Bowman's speech shed little new light on the 3-year-old failure.
"What we have is a high-level readout of a preliminary report, so we don't have much to go on at this point," Kress said. "But the conclusions that Bowman highlighted don't strike me as all that much different from what Barr said in his 2023 report, with the notable exception of the politically inflected commentary around tailoring and de-supervision. All of the findings about staff culture and hesitancy to raise issues were things that Barr discussed in his report have been well known for a while."
Kress said he is
"Hopefully we get to see the full 500-page report," he said. "I'm not reaching definitive conclusions until I see it."
