The Revolving Door Project, a Prospect partner, scrutinizes the executive branch and presidential power. Follow them at therevolvingdoorproject.org.
It’s been roughly three years since three of the four largest bank failures in United States history nearly wiped out a half trillion dollars of wealth, with Silicon Valley Bank, Signature Bank, and First Republic Bank collapsing one after another. The SVB collapse on March 10, 2023, was quickly followed by a crash at Signature Bank on March 12. First Republic Bank fell seven weeks later.
The episode was no mystery. We all witnessed the SVB bank run in real time while venture capitalists like David Sacks and Jason Calacanis stoked the panic by pleading for a federal bailout on social media. At bottom, all were brought down by poor risk management and inattentive bank supervisors, as I will discuss below.
Yet Federal Reserve Vice Chair for Supervision Michelle Bowman seems determined to avoid learning anything from the crisis, and is therefore setting the stage for another panic. She is actively refashioning what bank supervision entails while implicitly attempting to rewrite history by calling for a fresh review of the bank failures, particularly SVB.
We have more evidence than Calacanis’s all-caps tweets threatening disaster if his friends weren’t bailed out. Two separate reviews came to broadly similar conclusions. The first, ordered by then-Vice Chair for Supervision Michael Barr and released just seven weeks after the panic, was a self-assessment conducted by Fed staff who were not directly responsible for monitoring SVB. Reviewers identified four factors that contributed to the bank’s demise: (1) the bank’s ineffective risk management, including not having a chief risk officer at the time; (2) Fed supervisors’ failure to properly absorb the nature of the bank’s vulnerabilities as it grew; (3) Fed supervisors’ failure to ensure the bank promptly corrected these weaknesses; and (4) reduced supervisory standards and a “less assertive supervisory approach” as a result of the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), which weakened certain Dodd-Frank reforms.
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Five months later, the Fed’s Office of Inspector General (OIG) followed with a distinct material loss review, as mandated by the Federal Deposit Insurance Act whenever regulators are forced to tap into the Deposit Insurance Fund. The reviewers from the OIG pinpointed SVB’s pursuit of short-term profits and prioritization of growth over effective risk controls as proximate causes of its collapse. Similar to the Barr review, the Fed’s OIG acknowledged the Fed Board and San Francisco Fed’s supervisors’ inability to scale their oversight to match the bank’s growing complexities.
There were a few reasons for this mismatch. In particular, the 2018 EGRRCPA and the Fed’s corresponding 2019 tailoring rule were major factors. The latter raised the asset threshold for applying for enhanced prudential standards on bank holding companies from $50 billion to $100 billion. This freed firms with assets over $50 billion but under $100 billion, like SVB, from additional liquidity requirements, risk management requirements, and stress tests even as its assets rapidly grew. In essence, a smaller regional bank with $10 billion in assets and a larger regional bank with $95 billion in assets were treated the same as the examination framework changed, “becoming more ‘small bank like’ and less intense.”
Worse, the supervisors responsible for enacting this less intense framework were not appropriately trained to examine firms with assets greater than $50 billion, which were now part of their portfolio. Compounding all of that, the examination team at the San Francisco Fed was understaffed. The Fed’s OIG review found that management had allocated an inadequate amount of examiner resources toward supervising SVB. When the bank did eventually cross the $100 billion threshold in the fourth quarter of 2020, it continued to grow over the next three quarters, thereby becoming subject to the previously lifted enhanced prudential standards in June 2021. Still, the transition to a new set of examiners was handled poorly, according to the OIG.
In short, SVB and the other banks took a lot of stupid risks that the Fed should have stopped them from taking, but didn’t. As other potential financial crises bubble beneath the surface, it would be prudent to learn the relevant lessons and focus on ensuring the Fed is adequately prepared to identify and address vulnerabilities in our banking system.
Michelle Bowman—who, incidentally, voted for the 2019 tailoring rule—apparently has other ideas. She recently hired an external consulting firm to conduct a new publicly funded review of SVB’s 2023 failure. This additional postmortem will be handled by Starling Trust, a behavioral analytics company. Bowman penned an article for the firm’s “Physician, Heal Thyself” report series in 2024.
Bowman’s former and current colleagues have also contributed to the firm’s written output, including former Vice Chair for Supervision Randy Quarles, current Comptroller of the Currency Jonathan Gould, and former acting Comptrollers of the Currency Rodney Hood, Michael Hsu, and Keith Noreika. Gary Cohn, National Economic Council director in the first Trump administration, serves as one of the firm’s advisers, alongside BlackRock founder Barbara Novick and Lara Warner, former chief risk and compliance officer at the since-collapsed Credit Suisse.
Sens. Elizabeth Warren (D-MA), Bernie Sanders (I-VT), and Richard Blumenthal (D-CT) have blasted the decision, reminding Bowman of her vote for the tailoring rule and her support for the “less assertive” supervisory approach, two major reasons for the 2023 bank failures. A fresh review is unlikely to unearth new material, but it does present Bowman with an opportunity to shift blame away from the first Trump administration’s deregulatory actions. (The Federal Reserve is statutorily independent of the administration, but bank supervisory agencies usually attempt to “harmonize” their regulations across the federal government, resulting in the Fed’s oversight rules being tethered to administration policy more than other Fed responsibilities, especially monetary policy.)
A revisionist history exercise like Bowman’s might not be a pretext per se to gut the central bank’s supervisory arm—not that she needs one; Bowman already announced a 30 percent reduction last October—but it could serve as ammunition in her ongoing war with the Fed’s examiners. The Wall Street Journal has described Bowman’s relationship with supervisory staff as “combative,” reporting that Bowman has “sidelined” or “taken off” examiners after banks lodged complaints with her. That’s the sort of regulatory negligence you come to expect from a government official already dreaming of their post–public service employment.
Bowman’s Starling piece called for “accountability for regulators,” cautioning regulators not to equate “management of material risks” with “influencing a bank to make certain credit allocation decisions.” That was just a fancy way of previewing her current focus on “debanking,” a hobbyhorse she shares with President Trump, conservatives, and aligned industries like crypto, private prisons, and fossil fuels. The idea, in short, is that “woke” banks are refusing to give conservative individuals or institutions accounts. This fixation on the imaginary scourge of political debanking forms the basis of her wrongheaded decision to remove reputational risk from the supervisory process, as my colleague Dylan Gyauch-Lewis noted in the Prospect last October.
Bowman believes reputational risk plays a “hidden role,” which has allowed supervisors to “penalize or prohibit a bank from banking a customer engaged in legal activity.” Trump’s financial regulators have had up to a year to prove that supervisory pressure has made banks illegally discriminate against customers on the basis of reputation risk. The Office of the Comptroller of the Currency did release some findings, but it was no smoking gun. Some banks are indeed wary of doing business with companies that struggle to comply with anti–money laundering rules or facilitate the ongoing despoiling of communities. While the provision of credit does resemble a public-utility responsibility, banks are free to prioritize discernment when choosing their customers, within the bounds of anti-discrimination laws and community reinvestment guidelines.
What’s missing from the debanking debate is a real focus on low-income communities facing genuine barriers to accessing financial services. The Trump administration has proudly attempted to ensure the debanking of politically disfavored groups. How else would one explain the EPA’s order to Citibank to freeze the accounts of recipients of the $20 billion in grants from the Inflation Reduction Act? Or Russell Vought’s ghoulish campaign to deny individuals, communities, and organizations access to government benefits and grants?
Crypto might cry foul over banks’ caution, but the 2023 regional bank failures clearly show the value of reputational risk in the supervisor tool kit. SVB’s concentrated relationship with venture capital and Signature Bank’s concentrated relationship with crypto firms evidently accelerated their demise. Public perception of these relationships limited executives’ space to correct their unsound and risky management practices in time to stave off their banks’ eventual crashes. The public was forced to pay for this when regulators decided to invoke the systemic risk exception and tap into the Deposit Insurance Fund to keep deposits safe as the closures were resolved.
What a public that was unwittingly put on the hook deserves is a promise to hold these rapacious executives accountable. The FDIC did sue 17 former SVB executives a few days before Trump’s goons took charge, alleging gross negligence and breaches of fiduciary duty. The case continues to work its way through the courts, but the appropriate bookend to the SVB fiasco would be stiff penalties for these individuals, not a propaganda push. Bowman’s effort to whitewash recent banking history is an unnecessary sidebar that fuels culture-war grievances while an opportunity for real justice remains on the table.
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