With Silicon Valley Bank’s failure, opponents argue the Federal Reserve’s secretive bank monitoring has to be more flexible, transparent, and decisive.
At hearings last week, Fed Vice Chair for Supervision Michael Barr told lawmakers that supervisors had frequently flagged dangers to the collapsed bank, starting in 2021, and even restricted its development in 2022 because they remained ignored.
Despite that, SVB collapsed this month, sparking worries of contagion. Lawmakers have accused the Fed of not escalating the problem fast enough and asked if the process should be more open.
“The culture of supervision is steeped in secrecy; I hope SVB calls for some of that curtain to be removed,” said Aaron Klein, a Brookings Institution fellow and former Treasury Department official.
Most bank supervisors work privately.
“The regulators have all this confidential information, some of which has to be private… but some of which would be better if it were public,” Klein added. “It’s like saying you failed your health inspection, we’re giving you a C, but we don’t want any of your consumers to know.”
Regulators mark “matters requiring attention” for banks to address (MRA). Supervisors will issue a “matter requiring quick attention” for critical matters (MRIA). Both can set timeframes for banks to remedy the issue, but none prescribes remedies or is public.
Supervisors can issue a “consent order,” a formal, public enforcement action between a regulator and a bank, with a fee and a deadline to fix the problem if the issue persists.
Barr said the Fed granted six liquidity MRAs and MRIAs to SVB in November 2021 and an interesting risk modeling MRA in autumn 2022.
Rep. William Foster, an Illinois Democrat, suggested making MRAs public if not resolved after 60 days or placing bank executives’ bonuses in escrow.
Since exposing financial errors might induce bank runs and weaken system confidence, bank oversight is usually done behind closed doors. But, according to the Alabama School of Law, banking law professor Julie Hill says it helps banks preserve trade secrets.
This strategy shields banks from public scrutiny and makes it tougher to evaluate their supervision.
In Wednesday’s hearing, top House Democrat Maxine Waters questioned, “Are there ways we might make the supervisory process more open to encourage discipline and accountability?”
The Fed did not immediately react.
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