Can We Trust the Fed to Investigate Itself?

The financial panic caused by the collapse of Silicon Valley Bank (SVB) is putting the reputation and credibility of the Federal Reserve to the test. And rightly so. In the days and weeks after the failure of SVB, regulators and bureaucrats in the Biden Administration were quick to blame everyone other than the real culprits for the second-largest bank failure in American history.

Now that the dust has settled, we know that the failure of SVB was not due to flawed or weak banking regulations but rather poor supervision by state and federal regulators from top to bottom.

Ultimately, the primary reason why SVB suffered a run on its deposits was due to interest rate risk. SVB’s management had purchased a large number of long-term government bonds and mortgage-backed securities when interest rates were low. These purchases are not out of the ordinary, and all banks are inherently exposed to the risk of an interest-rate duration mismatch between their assets and liabilities, especially during a period of rising interest rates. In the case of SVB, this mismatch caused their failure.

No laws or regulations would have prevented SVB’s collapse, but proper oversight and supervision from regulators should have seen this coming. And most importantly, regulators should have taken meaningful action to sound the alarm not just with SVB’s management but more importantly the Fed. But the leadership of the Federal Reserve in San Francisco and Washington, as well as California bank regulators, did not take any preventative action, which is inexplicable.

It should come as no surprise that Treasury Secretary Janet Yellen and Fed Vice Chair for Supervision Michael Barr didn’t take any of the blame for this oversight failure when they testified before Congress in March about SVB’s collapse. Instead, they blamed bankers and Congress while assuring the American people that if the federal government was granted even more power than it already has, SVB would not have failed. 

In March, the Federal Reserve Board announced that Fed Vice Chair Barr is leading a review of the supervision and regulation of SVB. The review is expected to be publicly released by May 1. Given Vice Chair Barr’s previous testimony before Congress on this matter, the American people should be skeptical about Barr’s ability to deliver a fair and honest assessment. To ensure a fair review, consumers deserve to know what questions Barr is planning to ask in his investigation.

For example, how is Barr planning to identify the weaknesses that led to SVB’s collapse? What supervisory criticisms were issued to SVB, and in what form? To what extent did these criticisms directly concern the causes of SVB’s failure–not just concerns about SVB’s general condition? What was the level of supervisory experience of examiners assigned to SVB over the last decade? How many of these examiners had prior experience supervising an institution similar in size and complexity to SVB? How and when were SVB’s weaknesses escalated by senior regulators to the Board of Governors’ Committee on Supervision and Regulation?

American consumers deserve a fair report that clearly answers these questions without trying to dodge unwanted or embarrassing criticism of the Fed’s failure to act. If Barr’s report tries to whitewash this failure and pass the buck onto other actors that were not responsible for the collapse of SVB, then Congressional leaders should be ready to take real action to hold the Fed accountable.

One solution would be commissioning an independent review of the SVB collapse in order to hold the Fed’s feet to the fire so that we know the full story behind regulator’s actions leading up to the deposit run on SVB. Such a review is not unheard of, and the Bank of England underwent its own independent review in 2012 led by team of former officials and bankers. We can no longer trust the Fed to fix itself. The Fed does not have a good track record of self-investigations, and ultimately the Fed is accountable to Congress.

The best way to protect all Americans that have a bank account is for Congressional leaders like House Financial Services Committee Chairman Patrick McHenry (R-NC) to draw a line in the sand with the Fed. The American people deserve nothing less than prompt, visible, and meaningful accountability for all those responsible for the collapse of SVB.  

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