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Federal Reserve officials discussed removing Greg Becker, the former chief executive of Silicon Valley Bank, from the board of the San Francisco Fed in 2022, but decided against it because they were worried it would signal to the market the growing problems at the lender, according to a report released on Thursday.
The report from the Fed’s inspector-general also found that Fed examiners considered lowering SVB’s interest rate risk rating in November 2022, but ultimately did not.
The report concluded that supervisors “should have acted earlier or taken stronger action to address identified weaknesses at SVB”.
SVB collapsed more than four months later in March, surprising most of the bank’s investors and depositors and kicking off a regional banking crisis that led to two other bank failures and stock market turmoil. Government authorities were also forced to deploy billions of dollars in emergency measures in order to stem further fallout.
Becker resigned from the Fed’s board the day that SVB was closed.
The findings were part of a long-awaited report by the Fed’s independent inspector-general from its investigation into the central bank’s supervision of SVB following its failure. Another internal report spearheaded by Michael Barr, the Fed’s vice-chair for supervision, pinned the lender’s failure on management failures, mis-steps by internal supervisors as well as sweeping regulatory changes made during the Trump administration.
The IG’s report highlighted a number of acute management failures made by SVB’s leadership, in terms of protecting against the risk of rising interest rates and also “ineffective public communications” around plans to raise additional capital, which ultimately served as the catalyst for what became a historic bank run.
In the wake of SVB’s failure, the Fed has drawn scrutiny for the fact that Becker was a member of the board of the San Francisco Fed, which was the bank’s chief regulator. The report found no evidence that Becker influenced the Fed’s ratings or supervision of SVB. Nonetheless, according to the report, Becker’s Fed board position began raising alarm bells inside the Fed as early as the summer of 2022.
According to the report, “senior officials” at the Fed in Washington discussed Becker’s position and whether he should be removed from the San Francisco Fed board. They decided not to do so because of the public signal it would send, the report said.
“We believe that the CEO’s service on the FRB San Francisco board of directors created an appearance of a conflict of interest for the system,” the IG’s office wrote in Thursday’s report. “Given the potential for market-signalling challenges when removing a Reserve Board board member, we encourage the board to consider assessing the current policy.”
The report also found that, despite identifying problems with SVB’s exposure to interest rate risk and other management lapses, San Francisco supervisors did not downgrade the bank’s “Camels” ratings — which judges a lender’s capital, asset quality, management, earnings, liquidity and sensitivity to market risk — adequately.
Instead, in November 2022, Fed bank examiners left SVB’s interest risk Camels rating at a 2 out of 5, a level typically reserved for banks with relatively little interest rates issues, despite SVB’s growing paper losses on its bond holdings due to rising rates. Within months, SVB was forced to sell a portion of those bonds, solidifying losses, spooking depositors and causing the run on the bank that led to its collapse.
Examiners, the report said, “missed an opportunity to send SVB a stronger message about management’s need to proactively identify and manage risk”.