Report finds 'culture of risk aversion' hindered oversight of SVB, Fed official says

By Pete Schroeder

WASHINGTON, Sept 18 (Reuters) - A "culture of risk aversion" among examiners contributed to the collapse of Silicon Valley Bank rather than relaxed oversight, a top Federal Reserve official said on Friday in remarks flagging the initial findings of a review of the 2023 bank failure.

That and other findings outlined by Fed Vice Chair for Supervision Michelle Bowman contradicts some of the findings of the Fed's prior postmortem, which was led by her Democratic predecesssor, Michael Barr.

Bowman was nominated to the supervision role last year by President Donald Trump after Barr stepped down before his term ended, following reports the Trump administration was considering demoting him. Bowman, who had previously called for an independent study of the failure, hired consultancy Starling Trust Advisors to conduct another review.

On Friday, she said Starling's review showed that SVB failed from a confluence of vulnerabilities, including large unrealized accounting losses, an unstable deposit base, and a lack of readiness to obtain emergency borrowing when needed.

She added that Fed supervisors knew or should have known about those risks as much as a year before the lender's collapse, and failed to take "prompt and decisive action." She attributed that inaction to a "long-standing culture of risk aversion" among examiners, as well as lack of clear Fed decision-making and direction.

The report was quickly criticized by Senator Elizabeth Warren, the senior Democrat on the Senate Banking Committee, who called it "an embarrassing attempt to re-write history designed to pave the way for more dangerous deregulation that will lead to the next Silicon Valley Bank disaster."

Bowman is leading a comprehensive effort by U.S. bank regulators to streamline bank rules and oversight.

Barr's review had found that under his Republican predecessor Randal Quarles, also a Trump appointee, examiners felt pressured to go easier on banks while meeting "a higher burden of proof for a supervisory conclusion." It said that was particularly the case after Congress passed a 2018 law directing the Fed to ease rules for many banks.

Quarles has previously said that this was not true and that supervisors had "always been fully supported" by Fed leadership. "I expressly encouraged examiners to focus on liquidity risk and concentration of deposit risk," he told Reuters in 2023.

Bowman said any supervisory delays were not due to that 2018 law or by "any directive or suggestion" to reduce supervisory scrutiny and noted that Quarles had stepped down months before SVB's vulnerabilities became apparent.

Barr said his report showed the need to toughen bank rules and oversight, particularly for larger regional lenders. But many of his preferred changes failed to be enacted amid fierce pushback from the banking industry and skepticism from some congressional lawmakers.