U.S. Federal Reserve Chair Jerome Powell testifies

U.S. Federal Reserve Chair Jerome Powell testifies at a hearing on March 7, 2023.

(Photo: Aaron Schwartz/Xinhua via Getty Images)

As Fed Probe Shows Deregulation Fueled SVB Crisis, Warren Says Powell 'Must Be Held Accountable'

Sen. Elizabeth Warren said the Federal Reserve chair "failed in his responsibility to supervise and regulate banks that posed a systemic risk to our economy."

Sen. Elizabeth Warren said Friday that Federal Reserve Chair Jerome Powell and other officials "must be held accountable" after an internal Fed investigation found that deregulation and major supervisory lapses were partly to blame for the market-rattling failure of Silicon Valley Bank last month.

The findings of the investigation led by Fed Vice Chair for Supervision Michael Barr were detailed in a 118-page report that Warren (D-Mass.) applauded as "an unflinching assessment of SVB's implosion."

"The investigation clearly identifies how the 2018 legislation that weakened our bank rules and the Fed's 'tailoring' in response to that legislation were major contributors to SVB's failure," said Warren, who has introduced a bill that would repeal the GOP-authored deregulation law.

"The report reveals failures at every level: by SVB's executives and board, bank supervisors, and the Federal Reserve Board itself," the senator added. "Those responsible for these failures must be held accountable, including Chair Powell who failed in his responsibility to supervise and regulate banks that posed a systemic risk to our economy."

Powell, who presided over the Fed's weakening of regulations for mid-sized banks such as SVB in 2019, welcomed the Barr report in a statement and said he agrees with its call to enhance the central bank's regulatory practices, even though the chair has previously resisted efforts to connect SVB's collapse to deregulation.

The report describes the failure of SVB, which prompted an extraordinary federal rescue effort, as a textbook case of mismanagement by the bank and chastised its leadership's failure to "manage basic interest rate and liquidity risk."

But Barr also argues that SVB's collapse highlighted "weaknesses in regulation and supervision that must be addressed," an implicit criticism of Randal Quarles, Barr's Trump-appointed predecessor.

"Regulatory standards for SVB were too low, the supervision of SVB did not work with sufficient force and urgency, and contagion from the firm's failure posed systemic consequences not contemplated by the Federal Reserve's tailoring framework," the report reads.

Barr specifically singles out the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act, which loosened post-financial crisis regulations for banks with between $50 billion and $250 billion in assets—a category that included SVB. Powell publicly endorsed the changes, which Congress approved with bipartisan support.

Following the passage of the 2018 measure, the Fed enacted rules ostensibly aimed at "tailoring" the central bank's "regulations for domestic and foreign banks to more closely match their risk profiles."

But as then-Fed Governor Lael Brainard warned at the time, the central bank's changes went well beyond what the 2018 law required and weakened "safeguards at the core of the system," threatening the stability of the banking sector.

Barr's report notes that "over the same period that Silicon Valley Bank was growing rapidly in size and complexity, the Federal Reserve shifted its regulatory and supervisory policies due to a combination of external statutory changes and internal policy choices."

"For Silicon Valley Bank, this resulted in lower supervisory and regulatory requirements, including lower capital and liquidity requirements," the report states. "While higher supervisory and regulatory requirements may not have prevented the firm's failure, they would likely have bolstered the resilience of Silicon Valley Bank."

The report makes a number of broad policy recommendations, including calling for a "simpler and stronger oversight program and tailoring framework."

"We plan to revisit the tailoring framework, including to reevaluate a range of rules for banks with $100 billion or more in assets," Barr writes.

Liz Zelnick, director of the Economic Security and Corporate Power program at Accountable.US, said in response to Barr's report that "the rash of recent mid-sized bank troubles is a story that can't be told without one of its main characters, former Trump Fed official Randal Quarles, who instilled a culture of hands-off banking supervision that invited banks to make risky bets beyond their means."

"Congressional Republicans in the pocket of the financial industry played their part when they watered down risk assessment rules and shifted oversight powers to the Trump administration that shared their loyalties to Wall Street," Zelnick said. "Trump officials like Mr. Quarles used their newfound 'discretion' to assure mid-size banks there were no federal consequences to worry about if they gambled with other peoples' money in pursuit of profit—even if they couldn't afford to lose."

"Letting the financial industry write their own rules has led to instability and economic harm time and again, yet alarmingly, the MAGA House Majority sees the latest consequences of right-wing deregulation as an excuse to gut financial safeguards even further," she added.

Revolving Door Project executive director Jeff Hauser, for his part, faulted the new report for not specifically naming the individual Fed officials responsible for decisions that contributed to SVB's collapse.

"If there is a problem coming from the top, an independent, thorough report would have named who at the top is to blame," Hauser said. "Readers can strongly infer that former Vice Chair for Supervision Randal Quarles was a major player, and we echo Accountable.US's calls for him to testify before Congress. But the vice chair for supervision does not manage the staff of the Federal Reserve without the chair's approval, meaning Jerome Powell is ultimately responsible."

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