Regulators often follow bank failures with internal or external reviews to see what went wrong and to learn from those mistakes. A new post-mortem of the Federal Reserve’s role in the Silicon Valley Bank failure is running way behind schedule. Perhaps more significantly, the Federal Reserve has already implemented substantial changes to bank supervision well before completion of the post-mortem. These regulators essentially decided on shooting first and asking questions later.
Expert Shopping
This past February, the Fed’s Vice Chair for Supervision, Michelle Bowman, contracted Starling Trust Services to conduct an “independent review” of 2023 bank failures with a particular focus on SVB. The Fed played essentially no role in the supervision of Signature or First Republic. Not only was the FDIC the primary federal regulator in these cases but neither bank had a holding company. Only one other Fed-supervised bank failed in 2023. Heartland Tri-State Bank fell victim to a cryptocurrency scam initiated by its own CEO.
In June 2023, Bowman called for an independent review of the SVB failure to supplement the internal review completed by then-Vice Chair Michael Barr. Bowman claimed such a review “should play an important role in informing the future path of supervision and regulation. The diagnosis of what went wrong can help inform necessary changes to supervision and regulation.” She further cautioned that “Misperceptions and misunderstandings about the root causes and related issues could result in changes that are not only unnecessary but result in real harm to banks and their customers, to the financial system, and to the broader economy.”
The Barr report offered an unusually self-critical review of the Fed’s own supervision. The Barr Report runs 118 pages, glossed over some areas. It did not address potential conflicts of interest arising from the dual role of the Federal Reserve Banks as both bankers’ banks and as regulators. A similar issue arose with the Federal Home Loan Bank System in the 1980s. Overall, however, I found the report consistent with my own experience of what works and what doesn’t work when it comes to bank supervision. Barr’s criticism of tailoring requirements and lighter touch supervision upset some key players in the banking industry, Congress, and on the FRB itself. That didn’t make his findings misguided or wrong.
The Fed’s Inspector General also issued a Material Loss Review of SVB. While some have suggested the IG’s findings contradict Barr, I just don’t see it. The IG report was considerably shorter and there were some differences in focus. However, it certainly didn’t recommend issuing fewer MRAs, easing up on exam ratings, or deemphasizing the role of management. Additional studies of the SVB failure also endorsed a tougher approach to supervision. For example, this article in the Journal of Financial Crises argued that regulators should have subjected SVB to tougher interest rate risk standards and to the liquidity coverage ratio. The GAO called for escalating supervisory issues more quickly.
The only SVB post-mortem that supports current actions by the Fed and other regulators comes from the Bank Policy Institute, the lobbying arm for the nation’s largest banks. That analysis claims that the issuance of MRAs and a focus on management weaknesses distracted supervisors from more material financial risks. The analysis isn’t remotely credible, especially since it also supports lighter quantitative standards when it comes to capital and liquidity. But it still gained an influential audience since it told deregulation-minded policymakers what they wanted to hear. It’s a bit like the policy response to climate change. A Cornell University survey of more than 88,000 climate related studies found that more than 99.9% agree that climate change is mainly caused by humans. Yet some policymakers instead choose to believe the guy getting paid by the fossil fuel industry.
Banks sometimes request “independent” reviews by accountants, attorneys, and consultants, often at the behest of regulators. Unfortunately, these reviews often reflect expert shopping rather than a truly independent assessment. Bowman did a bit of expert shopping herself, hoping the third time’s the charm with the Starling selection.
Asking Questions Later
Bowman took office in June 2025 and hired Starling seven months later. At first glance, the timing doesn’t appear especially slow. But, given her prior remarks, why wasn’t this independent review among her first orders of business? Bowman became heiress apparent for the Vice Chair spot since November 2024. And she did not bother with consensus building or go through a request for proposal process that could slow things down.
The Starling contract was set to expire on July 6, 2026. However, news reports indicate that Starling has requested an extension until January 2027. Sen. Elizabeth Warren has referred the case to the Fed’s Inspector General, calling yet another study of the SVB failure an instance of government waste. Some of Warren’s accusations rest on thin evidence. However, Bowman has not helped her case by failing to respond to legitimate questions Warren had around the procurement and selection process this past February.
Bowman and others attribute the delay to the refusal by some former Federal Reserve employees to meet with Starling. Some members of Congress expressed outrage at this apparent non-cooperation. Michael Barr has offered to meet with Starling but also requests that questions be in writing. The Fed customarily provides questions in advance during CCAR reviews, so Barr’s request does not appear unusual. Current employees would also be expected to cooperate, whether they like it or not. However, these requirements would not apply to former employees. In fact, not even Inspectors General can require former employees to meet with them. And IGs have an official, congressionally mandated role. One can hardly expect greater deference to an obscure consulting firm contracted under a less than transparent hiring process.
Notwithstanding any legal requirements, former employees should cooperate. It is reasonable to hold officials responsible for decisions they made while in office. But no one has done more to undermine the Starling review than Bowman herself. Look what has happened to date. Bowman has already pushed out senior regulators, cut staff, redefined MRAs, established some dubious supervisory operating principles, doubled the number of large firms deemed well-managed, and proposed revisions to CAMELS ratings. Although the Starling review has faced serious delays, will it make much difference? If the Starling report shares Bowman’s vision, it will do little more than place an “independent” imprimatur on a fait accompli. Will it matter if the Starling report concludes that Barr, rather than Bowman, was mostly, right? Bowman has already salted the earth.
Coming Attractions
The Treasury IG’s in-depth review for First National Bank of Lindsay is also long overdue. While this small bank’s failure drew much less attention than that of SVB, the causes of its failure make it notable. FNBL failed due to insider fraud coupled with weak internal controls. The failed bank review will likely run counter to the OCC’s preferred narrative that deemphasizes the role of management and internal controls. We’ll discuss this case in more detail in an upcoming post.
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