Fed SVB probe pledges to be apolitical. Observers aren't so sure

• Key insight: The Federal Reserve has hired an outside group, Starling Trust Sciences, to review its handling of the 2023 failure of Silicon Valley Bank. Some policy analysts worry about the firm's independence.
• Expert quote: "Our focus is on facts, not politics, and on problems, not people. The objective is to follow the evidence wherever it leads, to develop a fuller understanding of what happened and why, and to identify lessons that can be applied going forward." — Stephen J. Scott, founder and CEO of Starling Trust Sciences.
• Forward Look: Several of Silicon Valley Bank's independent board members have spoken to Scott for the investigation; several former Fed employees have refused to participate. 

After three years, three government reports and two congressional hearings, there is still just one question hanging over the demise of Silicon Valley Bank: who, or what, is to blame.

Stephen J. Scott is the latest investigator to be tasked with getting to the root causes of the second-largest bank failure in American history. His firm, Starling Trust Sciences, has been commissioned by the Federal Reserve to conduct an external review of the agency's supervision of Silicon Valley Bank in the months leading up to its closure in March 2023.

Scott says that getting to the bottom of the matter means cutting through the partisan noise around the episode. 

"Our focus is on facts, not politics, and on problems, not people," he said in an interview with American Banker. "The objective is to follow the evidence wherever it leads, to develop a fuller understanding of what happened and why, and to identify lessons that can be applied going forward."

But some policy experts and advocates worry Scott's probe will muddy, rather than clarify, the underlying issues that led to the bank's collapse. 

"This is not a real investigation and it will not yield anything useful except a political club that [Fed Vice Chair for Supervision Michelle] Bowman will use to advance her ideological agenda," said Dennis Kelleher, head of the regulatory reform group Better Markets. "She's already said in speeches what this report is going to say. It's going to support her view that there needs to be a shift in supervision toward financial risks and away from 'processes, procedures and documentation.'"

Bank allies and regulatory advocates alike are frustrated with the current set of facts around the demise of the Santa Clara-based bank and the short-lived banking crisis it initiated. Some say the public record on the event does not delve deeply enough into conflicts of interest between SVB and its supervisors, the disconnect between on-the-ground examiners and officials in Washington, or the ebbs and flows of the Fed's supervisory culture.

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Aaron Klein, a senior fellow in economic studies at the Brookings Institute, said Bowman's push for an outside review should be commended, arguing that the Fed's initial internal report — overseen by then-Vice Chair for Supervision Michael Barr — omitted material facts that cast the Fed in a potentially negative light.

"The Fed's internal report promised to be unflinching, but yet somehow failed to mention the CEO of SVB was on the board of the San Francisco Fed," Klein said, referring to Greg Becker, who was a Class A director of the regional reserve bank that supervised his bank. "That's a flinch bigger than Mike Tyson pauses."

Scott said other key pieces of information are missing from the narrative as well, including the perspective of SVB officials. He said he has already spoken to several of the bank's independent board members.

"We've sought that other side of the story," Scott said. "If for no other reason, I think this makes our review uniquely valuable."

Still, the facts of the bank's financial condition at the time are well known and uncontested. It grew quickly during the pandemic era as its customers — venture capital firms and their portfolio companies — built up huge sums of uninsured deposits. The bank used those liabilities to buy long-dated Treasuries. When the Fed raised interest, those bonds incurred major paper losses at the same time that the SVB's customers were burning through their cash. When the bank was forced to sell Treasuries at a loss to satisfy withdrawals, depositors ran.

These issues were identified by the Fed's own postmortem as well as subsequent reports by the Fed's Office of the Inspector General and the Government Accountability Office. Graham Steele, staff director of the Corporations and Society Initiative at Stanford Graduate School of Business and a Treasury official in the Biden administration, said the Fed has already learned enough to move on from the episode.

"The causes of SVB's failure have been reasonably clear for some time: the combination of interest rate risk, rapid growth, concentration to the tech sector — and, importantly, a supervisory and regulatory regime that failed to keep pace with these growing risks," Steele said. "It's difficult to see why the Fed would spend its resources reopening this episode unless they have a desire to rewrite history in some way.

"The most charitable interpretation is that this is simply an effort at whitewashing the responsible policies and parties," he added. "More concerning would be if the report becomes a pretext for policy or personnel actions."

Scott acknowledged that there are large overlaps within the three existing government reports on the failure. But, he said, conclusions that the bank had poor governance and lackluster supervision are not detailed enough.

"That's a bit like saying 'the patient died from a lack of sufficient health.' It's not terribly instructive," he said. "Complex failures don't trace to a single source. There's value in understanding how governance structures, management decisions, supervisory practices, and market conditions all interacted to produce visible outcomes."

Scott is a longtime financial analyst and investigator, having worked on forensic probes of large institutional failures in the U.S. and abroad. Starling, which he founded in 2014, is an applied behavioral sciences firm that offers risk management software. 

While Starling has a relatively small footprint in the banking sector, it is backed by several prominent figures in financial regulation. Its board of advisors includes former director of the National Economic Council and former Goldman Sachs Chief Operating Officer Gary Cohn, former New York Fed President Bill Dudley and former member of the Supervisory Board of the European Central Bank Elizabeth McCaul. Former Fed Vice Chair Randal Quarles has also done work for the firm. 

Bowman has long taken issue with the Fed's internal account of the SVB failure — a 114-page report compiled under her predecessor, Michael Barr — and advocated for an independent review. During her confirmation hearing before the Senate Banking Committee last year, she pledged to commission such a report if confirmed.

In congressional testimony on February 26, Bowman said the Fed "recently launched" such a review using a third party, noting that it would delve into the "activities that were undertaken within our supervisory responsibilities and how we missed the financial vulnerabilities at Silicon Valley Bank that manifested in its failure."

In that hearing and in various other public remarks delivered since, Bowman has said the Fed took its "eye off the ball" and was "distracted" by issues within Silicon Valley Bank that were not directly related to material financial risks. 

During an oversight hearing earlier this month, Bowman identified that group as Starling. She also noted that "several" people from the Fed have declined to be interviewed by Scott for the review. Scott confirmed that multiple people — "more than one, less than 10" — have chosen not to participate in the review, but clarified that they were all former Fed employees. 

Bowman has not committed to releasing the report in full or its key findings, but several members of Congress are keen to learn more about the Fed's supervisory shortcomings.

"Congress wants answers," Rep. Andy Barr, R-Ky., told Bowman during a House Committee on Financial Services oversight hearing earlier this month. "This committee deserves answers, objective answers, about what were the true supervisory and bank management failures that led to the collapse of those institutions and the subsequent run on deposits."