The recent bankruptcies of three US lenders, Signature Bank, Silicon Valley Bank and Silvergate Bank, have reduced confidence in the nation’s banking system. The debacles have also put financial regulators on the bench, notably the Federal Reserve Bank of San Francisco, the supervisor of Silvergate and Silicon Valley Bank.
Amid these failures, a question that took hold during the 2008 financial crisis has resurfaced: Is the Federal Reserve, tasked with supervising the banks for which it is the chief regulator, too friendly or aligned with them to make the decision? job?
One factor contributing to that view: the practice of regional banks in the Federal Reserve system of inviting executives from the institutions they regulate to sit on their boards.
As of 2019, Gregory Becker, the former CEO of Silicon Valley Bank who presided over its rise and fall, was a director of the San Francisco Federal Reserve. After his bank collapsed, he was removed from the board of the San Francisco Fed.
Lynn Turner, a former chief accountant at the Securities and Exchange Commission, has interacted with the Federal Reserve for decades, both as an auditor and as a regulator. “The Fed serves to protect the banks instead of serving American depositors and investors,” she said in an interview. «Calling the Federal Reserve a ‘bank supervisor’ with bank executives on its boards is absolutely an oxymoron.»
Silvergate, with $12 billion in deposits, and Silicon Valley Bank, with $160 billion, collapsed for different reasons. But, the analysts said, the growing risks in the operations of both institutions were plain to see. However, the Fed examiners responsible for watching them appear to have done little or nothing to correct or rein in them, analysts said. And unlike other financial regulators, the Fed also appeared to ignore a warning it received last summer about the run-on risks posed by unrestricted crypto trading.
Silvergate Shut Down Because It Facilitated Crypto Transactions That Turned Toxic After FTX Collapse; Meanwhile, Silicon Valley had too little cash to handle a run on depositors and was forced to sell investments at a loss. Both risks had been well known for months and were publicized in regulatory documents or in statements by bank executives.
Silvergate said this month that it was winding down its operations. Federal Deposit Insurance Corp. is still seeking buyers for Silicon Valley Bank or its assets. Signature Bank, which had crypto exposure, had also met the beginnings of a run on panicked depositors when its regulators in New York seized it on March 12.
On March 13, the Federal Reserve Board announced a review of the supervision of Silicon Valley Bank. Leading the review is Michael Barr, its vice president of supervision, who said in a statement: “We need to be humble and conduct a careful and thorough review of how we supervise and regulate this company, and what we should learn from this experience. ” No such review related to the Fed’s supervision of Silvergate Bank has been announced.
Attempts to contact the San Francisco Federal Reserve for comment on its regulatory actions were unsuccessful. Its media line was busy for several days, and an email address is not provided for reporter inquiries. The main number also does not provide a way to reach a spokesperson, and there was no response to an email seeking comment sent to a general mailbox.
Tyler Gellasch is president and CEO of Healthy Markets, an investor-focused nonprofit, and a former attorney for the then-senator. Carl Levin, D-Mich., who helped draft the Dodd-Frank banking reforms. When asked about the Fed’s oversight of the two failed banks, he said: “There will always be bad actors and incompetent management teams, but bank regulators exist to stop them before they commit multi-billion dollar messes. And if regulators can’t do that with the easy stuff, what are they there for?
Certainly red flags were flying at both institutions, analysts said. At Silicon Valley Bank, the signs were a minuscule position of cash available to depositors’ demands: just 6% of assets, compared with 9.5% held by its peer institutions, regulatory filings show. And the bank’s deposit tidal wave, which more than tripled in three years, from $57 billion to $183 billion in 2022, should have raised questions about its management’s ability to handle such growth, analysts said.
“The bottom line is that there was lax regulatory oversight of Silicon Valley operations,” Charles Peabody, a veteran banking analyst at Portales Partners LLC, wrote in a March 12 note to clients. framework for smaller institutions like Silicon Valley Bank, he concluded, and «partly because of its inept regulatory oversight body (ie, the Federal Reserve).»
At Silvergate, the danger centered on cryptocurrencies. It was one of the few banks in the US that allowed customers to move dollars or other fiat currencies to cryptocurrency exchanges.
Silvergate, once a sleepy industrial lending company in San Diego with four branches, began the shift to cryptocurrency in 2013. Among its clients, and backers, was Sam Bankman-Fried, co-founder of cratered cryptocurrency exchange FTX. and its related companies. The FTX companies had 20 different accounts at Silvergate, according to a bankruptcy filing; one was North Dimension, a company with a peculiar and apparently bogus electronics website that prosecutors say was instrumental in FTX’s misappropriation of customer funds.
As a regulated institution, Silvergate was responsible for monitoring its clients’ accounts for illegal activity, such as money laundering or tax evasion, and alerting regulators to suspicious transactions. Before the bank began to shut down, he told NBC News that he «did significant due diligence on FTX and its related entities.»
However, as its extensive ties to FTX became known, Silvergate faced huge ransom demands from depositors. In December, customers withdrew nearly 70% of the bank’s $11.9 billion in deposits, according to a February report from the FDIC inspector general. Running to meet the bailouts, the bank sold $5.2 billion of debt securities it held for investment, losing $718 million in the process. That was more than the bank had earned since 2013, the IG report said.
Caitlin Long is the founder of Custodia Bank Inc., a special purpose depository institution in Wyoming that acts as a custodian of digital assets and only holds cash, in amounts in excess of its deposits, to meet potential redemptions. Last summer, she said, she warned federal financial regulators, including the Federal Reserve, that bank run risks were high among institutions that serve the crypto industry.
“There was a risk of a run on the bank in this whole industry,” he said in an interview. «I don’t think any other investment than cash is appropriate for a bank in this sector, because, as we saw, all deposits can be withdrawn in a few seconds.»
Other regulators reacted to his warning, but the Fed did not respond to it, Long said. In January, rejected your bank’s application to become a member of the Federal Reserve System. The Fed said that «the company’s request, as submitted, is inconsistent with the factors required by law.» He also contended that the company’s business model and proposed focus on digital assets presented security and robustness risks.
Long disagreed, noting that Custodia has cash backing more than 100% of its deposits. Custody has sued the Fed in federal district court over the decision.
Existing banks with crypto operations, like Silvergate, appear to have been “approved with no questions asked” by the Fed, Long said, “while startups seeking permission for everything we did were denied.” All in all, a perplexing paradox, she said.