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San Francisco Fed President Mary Daly, whose district suffered the second-largest bank failure in U.S. history and became the target of criticism, would generally not have been a key player in oversight of Silicon Valley Bank, several former and current Fed officials told CNBC. .
A highly centralized design of Fed oversight of large banks such as SVB with assets of more than $100 billion places oversight under the staff and direction of the Federal Reserve Board of Governors in Washington.
Regional Fed chairs may be more or less involved in overseeing their largest banks, these officials said, but key decisions about policy and enforcement would have been made in Washington, not by Daly.
“She was not in the chain of command,” a former Fed Bank chairman told CNBC. “Surveillance actions taken by San Francisco Fed staff would have been authorized by Washington.”
Daly and Fed board officials declined to comment on the report. Officials who spoke to CNBC requested anonymity so they could speak candidly about the matter.
Washington takes the lead
Regional bank presidents and supervisory staff directly oversee smaller community banks with assets of less than $100 billion.
But while major bank examiners who work in regional offices are hired and can be fired by regional bank presidents, the bulk of their reporting is overseen by the board in Washington.
Data shows that hundreds of billions of dollars left small banks, some of which went to big banks, and hundreds of billions more left the banking system and ended up in money market mutual funds .
This raised significant questions about Fed banking supervision and its inability to act more forcefully on issues it had previously identified, including a concentrated deposit base and mismanaged interest rate duration risk. .
Both the House and Senate held hearings this week on the issue, with Republicans accusing Daly and the San Francisco bank of focusing more on climate change risk than financial risk.
“The San Francisco Fed focused on pursuing leftist policies in which it had absolutely no expertise, ignoring one of the most basic risks of bank interest rate risk,” the senator said. Republican of Tennessee, Bill Hagerty.
Talk, but no action
In response, Michael Barr, the Fed’s vice chairman for oversight, widely acknowledged that the board is at the center of oversight, where local reviewers report to the board, saying, “Federal Reserve reviewers of San Francisco reported these issues to the board, called them to the bank…and these actions were not acted upon in a timely manner.”
The SVB saw massive growth in 2020 and 2021 and moved into the category of large banking organizations, where the bulk of oversight was provided by San Francisco Fed examiners who reported primarily to Washington.
San Francisco Federal Reserve Chair Mary Daly reacts at the Los Angeles World Affairs Council town hall, Los Angeles, California, U.S., October 15, 2019.
Anne Sapphire | Reuters
A former Fed official said Washington defines the strike zone for banks by establishing policy, and local examiners determine whether the bank meets those policy requirements.
In the case of SVB, supervisors issued seven issues needing attention or matters needing immediate attention regarding its liquidity and interest rate risk.
Officials said these MRAs or ARMs would have been approved by Washington. In the summer of 2022, the bank’s rating was downgraded to “fair” and its governance deemed “deficient”.
The bank was not well managed and was subject to growth restrictions. It’s unclear whether the reviewers pushed Washington for tougher action.
But regulators have not taken tougher action at their disposal, including fines, cease-and-desist orders or enforcement actions, which would have been public.
Conflict of interest
Former Fed officials interviewed by CNBC said they had experienced instances of frustration when they pushed Washington to act faster or more forcefully on a bank, but their complaints had little upside. impact.
It is unclear whether Daly urged Washington to take action.
The SVB chairman served on the board of the San Francisco Fed, and a Fed official said regional Fed chairmen were not allowed to get involved in overseeing members of their board of directors.
However, if the matter was serious, Daly could have asked the SVB executive to resign from the board, a former official said.
SVB’s failure raises important questions about the Fed’s supervisory structure: Should more powers be delegated to regional presidents? Does the Fed, at its highest levels, give sufficient priority to supervision over monetary policy?
A former official told CNBC that Daly is unlikely to come out clean in the current review.
But the official said there was no way to tell she was making the most important decisions about the bank’s failure. A review of what went wrong will likely point more strongly to Washington, its oversight bureaucracy, and board leadership than San Francisco.
Clarification: Fed Vice Chairman of Oversight Michael Barr was referring to the SVB board when he talked about reviewers reporting issues with the bank to the “board.” An earlier version was unclear on the reference. For a bank such as SVB, local examiners are responsible for making day-to-day decisions based on an oversight framework set by the Fed’s Board of Governors and consulting with board staff on resulting decisions..