The failure of theFederal Reserve Bank of San Francisco to adequately monitor Silicon Valley Bank (SVB) and to order the bank to take corrective action prior to the occurrence of a disastrous bank run is the source of an increasing amount of criticism that is being leveled against the San Francisco branch of the Fed.
In order to perform the mission of the central bank to regulate and oversee financial institutions in order to monitor risks and safeguard the safety and soundness of the banking system, it is important that the Federal Reserve maintains a network of 12 regional banks around the country. The Federal Reserve Bank of San Francisco has authority over most of the western United States, which includes the state of California. Moreover, the San Francisco Fed served as the principal regulator of Santa Clara-based SVB along with its parent holding company.
In addition to the involvement of Greg Becker, former SVB CEO, who was on the board of the San Francisco Fed up until his bank collapsed, Mary Daly, the President of the San Francisco Fed, is being questioned about how the regulators ceased to take action. Daly is also being questioned about the role of Becker.
In a letter he sent to Daly on Thursday, Ted Cruz, a Republican from Texas and the ranking member of the Senate Commerce Committee, said, “The SF Fed’s failure to address SVB’s obviously risky structure is frankly shocking.”
Cruz questioned Daly with a number of inquiries in an attempt to “understand how the SF Fed missed so many obvious warning signs about SVB’s lax risk management practices.” The senator gave her until March 30 to answer, and he also sent the letter to the top leadership of the Federal Reserve, including Chairman Jerome Powell.
Some of the questions that were asked included whether or not SVB carried out the necessary liquidity stress tests and how those tests, if carried out, accounted for the possibility of an increase in interest rates. Other questions included whether or not it got an exemption from the requirements for stress testing and whether or not anyone discussed the issue at the San Francisco Fed.
The circumstances for the bank run that began earlier this month and ultimately led to the failure of Silicon Valley Bank had been accumulating over the course of many years. The majority of SVB’s customers were Bay Area technology enterprises, primarily start-ups.
