Recent crashes of three U.S. lenders, Signature Bank and Silicon Valley Bank, have lowered confidence in the country’s banking system. Financial regulators have been put on notice by the Federal Reserve Bank of San Francisco (overseer of Silvergate and Silicon Valley Bank).
These failures have prompted a question that was raised during the 2008 financial crisis: Is it too friendly or too aligned to the Federal Reserve in order to perform its job of supervising banks?
This view is supported by the Federal Reserve system’s practice of inviting executives from the institutions it regulate to their boards.
Gregory Becker, former CEO of Silicon Valley Bank and who oversaw its rise to fall, has been a director at the San Francisco Fed since 2019. He was expelled from the San Francisco Fed board after his bank collapsed.
Lynn Turner, an ex-chief accountant at the Securities and Exchange Commission was involved with the Fed for many decades as both an auditor and a regulator. In an interview, he stated that the Fed was there to serve the American depositors as well as investors. “Finally, it is absurd to call the Fed a bank supervisor with bank executives on their boards.
Silvergate with $12 billion in deposits and Silicon Valley Bank with $160 billion collapsed for various reasons. Analysts said that there were rising risks in the operations of both banks. Analysts said that the Fed inspectors who are responsible for monitoring them have done little to no to correct or rein in them. The Fed, unlike other financial regulators did not seem to pay attention to a warning that it received last summer regarding the risks of bank run caused by unfettered cryptocurrency operations.
Silvergate was closed due to its facilitation of crypto transactions that were toxic after FTX collapsed. Silicon Valley, meanwhile had too few cash to deal with a depositor run, and was forced to make losses on investments. These risks were well-known and made public in regulatory filings as well as statements by bank executives.
Silvergate announced this month that it was closing down operations. The Federal Deposit Insurance Corp. continues to search for buyers for Silicon Valley Bank and its assets. Signature Bank, which was exposed to crypto, was also seized by New York regulators on March 12.
On March 13, , the Federal Reserve Board announced that it was conducting a review on the supervision of Silicon Valley Bank. Michael Barr, the vice-chair for supervision, is leading the review. He stated in a statement that he needed to be humble and do a thorough and comprehensive review of how he supervised and regulated the firm and what lessons we can learn. No review has been done regarding Silvergate Bank’s supervision by the Fed.
The San Francisco Fed was not able to be reached for comment regarding its regulatory actions. The phone number was busy for several days and there is no email address to be reached by reporters. The main number does not provide a way for reporters to contact a spokesperson and an email requesting comment was not replied to.
Tyler Gellasch, the president and CEO at Healthy Markets is an investor-focused non-profit organization. He was also the former counsel to Sen. Carl Levin (D-Mich.) who helped draft the Dodd-Frank bank reforms. When asked about Fed oversight of the failed banks, Gellasch said that there will always be bad actors and incompetent managers, but banking regulators exist for them to stop them from making multibillion-dollar mistakes. If regulators are unable to do this on the simple stuff, what purpose do they have?
Analysts said that red flags were raised at both institutions. The signs at Silicon Valley Bank were that there was a very small cash position for depositor demand — only 6% of assets compared to 9.5% held by its peer institutions. Analysts said that the bank’s unprecedented growth in deposits, which grew from $57 billion to $183 million in 2022, should have raised concerns about its management.
Charles Peabody (a veteran bank analyst at Portales Partners LLC) wrote that “the bottom line was that there was a lack of regulatory oversight Silicon Valley’s operations.” He sent this note to clients on March 12. He concluded that the relaxed policing was due in part to the Federal Reserve’s inept regulatory oversight and a less strict regulatory framework for smaller institutions such as Silicon Valley Bank.
The peril at Silvergate was crypto. It was , one of only a handful of U.S. banks that allowed customers to transfer dollars or other fiat currencies onto crypto-exchanges.
Silvergate, once a small industrial loan company with only four branches in San Diego, began to switch to crypto in 2013. Silvergate was once a small, inactive industrial loan company with four branches in San Diego. In 2013, it began to switch to crypto. According to a bankruptcy filing, FTX companies had 20 accounts at Silvergate. was North Dimension. This was a strange and phony electronic website that prosecutors claimed was key to FTX’s misappropriation.
Silvergate, as a regulated institution was responsible for monitoring the accounts of its clients for illegal activities such as tax evasion or money laundering and alerting regulators to suspicious transaction. NBC News was told by the bank that it had done “significant due diligence” on FTX, and related entities before it closed down.
Silvergate was subject to huge redemption requests from depositors due to its extensive ties with FTX. According to a February report from the FDIC inspector general, almost 70% of $11.9 billion worth of deposits were withdrawn by customers in December. To meet redemptions, the bank sold $5.2 Billion in debt securities that it had for investment and lost $718 M. This was more than the bank had made since 2013, according to the IG report.
Custodia Bank Inc. was founded by Caitlin Lang. This Wyoming special purpose depository serves as custodian for digital assets. It also holds cash in excess of its deposits to cover any redemptions. She said that she had warned federal financial regulators (including the Fed) last summer about the high risk of crypto-related bank runs.
In an interview, she stated that there was a lot of bank run risk in this industry. “I do not believe any other investment than cash is appropriate for banks in this sector because, as we have seen, all deposits can be withdrawn within a few seconds.”
Long stated that while other regulators responded to her warning, the Fed didn’t respond to her. In January, denied the application of her bank to join the Federal Reserve System. The Fed stated that “the application as submitted by the firm is inconsistent with the requirements under the law.” Additionally, it claimed that the proposed focus on digital assets and the business model of the firm presented safety and soundness risk.
Long disagreed and noted that Custodia’s cash back more than 100% of its deposits. Custodia sued the Fed in federal court for the decision.
Existing crypto-operating banks, such as Silvergate, seem to have been “waved though without questions” by Fed, Long stated. However, startups that sought permission for all they did were denied.
