Less than two years before Federal Reserve chairman Jerome Powell cited systemic risk as a justification to rescue Silicon Valley Bank (SVB)’s depositors, Powell approved the same bank’s merger application, insisting that the new, larger institution would present no significant danger to the wider financial system, according to documents reviewed by the Lever.
“SVB Group’s management has the experience and resources to ensure that the combined organization would operate in a safe and sound manner,” wrote Federal Reserve officials in June 2021, as they approved the company’s $900 million acquisition of Boston Private Bank and Trust. “The organization would not be a critical services provider or so interconnected with other firms or markets that it would pose significant risk to the financial system in the event of financial distress.”
All six members of the Federal Reserve Board voted to approve the merger.
Yet when financial distress hit twenty months later, the Federal Reserve Board unanimously voted, alongside the Federal Deposit Insurance Corporation (FDIC), to invoke the rare systemic risk exemption, giving the government the authority to guarantee Silicon Valley Bank’s uninsured deposits. The FDIC only insures up to $250,000 in each customer’s deposits, and more than 90 percent of SVB’s deposits were reportedly uninsured at the end of 2022.
On Monday, the Federal Reserve announced it will review its oversight of the bank leading up to its collapse.
“The events surrounding Silicon Valley Bank demand a thorough, transparent, and swift review by the Federal Reserve,” Powell said in a statement.
Fed vice chair Michael Barr added, “We need to have humility, and conduct a careful and thorough review of how we supervised and regulated this firm, and what we should learn from this experience.”
Powell’s Record Deregulating SVB
Powell backed SVB’s request for merger approval despite one major shareholder warning against the transaction, arguing that SVB was vastly overvalued and faced headwinds.
The Fed’s support for the SVB merger — and the assertion that the bank would pose no systemic risk — followed Powell leading or signing off on other deregulatory moves that may have enabled SVB’s rapid collapse.
Under Powell, the Fed in 2019 sided with bank lobbyists and implemented a “tailoring rule,” which loosened oversight of banks of SVB’s size, including by lifting liquidity requirements, reducing the scope and frequency of stress tests, and allowing those banks to opt out of reporting expected losses.
The following year, Powell moved to exempt banks’ venture capital investments from the Volcker Rule, which is aimed at preventing federally insured banks from using deposits to invest in risky assets.
SVB, which made substantial venture capital investments, had been pushing for that exemption since before the Volcker Rule went into effect in 2015. The Federal Reserve had separately approved a five-year extension for SVB to come into compliance with the Volcker Rule in 2017.
Beyond the deregulation, the Federal Reserve was also the primary entity tasked with supervising the bank and spotting warning signs.
“The Fed has much more and superior knowledge, information, expertise, and access to banks than short sellers, rating agencies, and the media, yet they all appear to have done a much better job at identifying the very serious risks at SVB than the Fed,” said the nonprofit Better Markets in a statement calling for an independent investigation of the central bank’s conduct in the lead-up to SVB’s collapse.
The Federal Reserve Bank of San Francisco was SVB’s primary supervisor. Gregory Becker, CEO of SVB, was elected to the San Francisco Fed board of directors in 2019, as one of the banking representatives. He left the board last Friday.
Sen. Elizabeth Warren (D-MA) said that Powell should not be involved in the Fed’s review of its oversight of SVB, given his role in creating the conditions for the bank’s collapse.
“Fed chair Powell’s actions to allow big banks like Silicon Valley Bank to boost their profits by loading up on risk directly contributed to these bank failures,” Warren said in a statement Tuesday.