As U.S. regulators start to overhaul the way they police lenders after three banks failed this year, they will have to address examiners' hesitancy to raise red flags, a deep-seated problem that has plagued the system for years. The Federal Deposit Insurance Corporation (FDIC) this month released its review into the demise of First Republic Bank, the third official postmortem into the crisis which also felled Silicon Valley Bank (SVB) and New York's Signature Bank. The postmortems on why bank managers and regulators were not able to avert disaster reveal a common theme: Federal Reserve and FDIC examiners tasked with ensuring banks follow rules and remain sound spotted major problems but acted too slowly.
- As U.S. regulators start to overhaul the way they police lenders after three banks failed this year, they will have to address examiners' hesitancy to raise red flags, a deep-seated problem that has plagued the system for years.
Federal Reserve examiners spotted "foundational" issues with SVB's liquidity risk management in 2021 but were still drafting a disciplinary action the day it died, the Fed report found. Likewise, a 2019 FDIC notice warning Signature Bank's board about liquidity planning problems "remained outstanding" when it failed, according to the FDIC's review.
"Once you've detected the information; do you have the courage to do something?" said Charles Calomiris, a professor at Columbia Business School and former official at the Office of the Comptroller of the Currency , noting examiners worry that raising red flags will "make everybody angry."'PUSHBACK' The Fed declined to comment. An FDIC spokesman referred to Chair Martin Gruenberg's previous comments that the problems identified at Signature Bank are "an area of urgent focus."
According to the SVB report, staff said that under Quarles, a Trump appointee, they felt pressured to go easier on banks while meeting "a higher burden of proof for a supervisory conclusion." "The problem with supervision at the Fed is that it is too obsessed with process and not enough with actual risk," said Quarles.Michael Barr, Quarles' successor, publicly said in June that it can be hard for examiners to confront bank management in good times, and that Fed culture makes it difficult to act quickly. In May testimony, he called for a "culture that empowers supervisors to act in the face of uncertainty.
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