From Breakingviews - Fed’s self-scrutiny starts off on the wrong foot
The Federal Reserve building is pictured in Washington, U.S., on March 19, 2019.to many of its customers and investors. It ought not to have surprised the Federal Reserve, though. Central bank staff had flagged in January that the tech-adjacent lender was at risk of possible cash shortages. The Fed is now investigating how its supervision of SVB could have been better. But it’s a stretch to think the institution, with its tangled, partly centralized structure, can conduct a warts-and-all review.
It’s an intricate process, to put it mildly. Banks with assets worth $100 billion or more face elaborate reviews, which involve a body called the Large and Foreign Banking Organization Management Group. This includes both representatives from the Board of Governors and the regional Reserve Banks. Local teams submit their findings and propose separate ratings annually for capital, liquidity and governance, which are vetted by this cross-Fed group.
It was a lack of liquidity that ultimately felled SVB. And while the timing couldn’t have been foreseen, several weaknesses had been, according to a person familiar with the situation. SVB was rated in 2022 as having satisfactory liquidity management, but with half a dozen outstanding “matters requiring attention” and “matters requiring immediate attention,” according to a person familiar with the situation.
True, it’s not obvious the central bank could have done much about this in the time it had. Supervisors had previously noted, and reflected to the Fed group, which vets bank ratings, that SVB had made progress in tackling some of its weaknesses. But the dispersed flow of information within the Fed about the bank’s troubles poses a problem in attributing accountability for supervision and ratings.
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