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A new report assesses last month's bank failures and includes lessons for the future


Who's responsible for two big bank failures last month - bank managers, right? Well, today government regulators admitted they're partly to blame as well. In a scathing report, the Federal Reserve acknowledged that it failed to properly supervise Silicon Valley Bank. The FDIC also shouldered some of the blame for the collapse of Signature Bank in New York two days later. The implosion of the two big lenders rattled nerves throughout the financial system. We're going to talk through these mea culpas from bank regulators with NPR's Scott Horsley and David Gura. David, sit tight for a minute. I'm going to get to you. But first I want to talk to Scott. The Fed, Scott, was pretty honest in its assessment about how it supervised Silicon Valley Bank or failed to supervise it. What were some of the key findings in their report?

SCOTT HORSLEY, BYLINE: Yeah. Fed officials were blunt, saying, we are responsible for riding herd on banks. And in this case, we dropped the ball. Fed supervisors were slow to recognize the extent of the problems at the bank, and when problems were identified, supervisors didn't act forcefully enough to make sure they were corrected. Michael Barr, who oversaw this Fed review, says part of the problem was a policy choice the Fed made back in 2019 to exempt all but the biggest banks from the strictest oversight. At the same time, he said, there was a cultural shift towards less aggressive bank supervision. Here's how Dennis Kelleher, who heads the watchdog group Better Markets, describes it.

DENNIS KELLEHER: Track one was to deregulate the banks, and track two was to disempower the supervisors who were supposed to police compliance with the regulation. It was a major cultural change that was, in summary, back off the banks.

HORSLEY: And the Fed acknowledged today that light-touch regulation allowed the problems at Silicon Valley Bank to fester until it was too late.

BLOCK: OK, so that's the look back. What about going forward? What does this mean for bank regulation in the future?

HORSLEY: Well, the Fed promised much different and more aggressive bank supervision from here on out. Barr, who took over as the Fed's top bank regulator last summer, was already inching in that direction. And Fed Chairman Jerome Powell said in a statement today he supports Barr's call for stronger oversight. You know, one of the things this episode demonstrates is that bank runs can happen much more quickly than they did in the past now that rumors about a bank problem can spread at the speed of social media and customers can move millions of dollars with a tap of their smartphone. You know, customers at Silicon Valley Bank tried to withdraw $140 billion in just two days. That's unprecedented. And in that kind of environment, regulators have to be more nimble.

Another lesson is that too-big-to-fail banks are not the only ones you have to keep an eye on. Even a midsized bank like Silicon Valley can do a lot of damage if people suspect its problems might spread to other banks. Now, in this case, emergency action by the Fed and the FDIC helped to head off a nationwide run on banks. But Barr says you need better supervision so it doesn't get to that point.

BLOCK: And let's bring David Gura in now from New York. David, what about the FDIC and New York state's financial regulator? What did they have to say about Signature Bank?

DAVID GURA, BYLINE: Well, there are a lot of echoes in these two reports about Signature Bank of what the Fed said about Silicon Valley Bank. According to the FDIC, Signature Bank's management was, quote, "the root cause of the collapse." Regulators say the lender, which also had a lot of large uninsured deposits - more than most banks - ignored warning signs and was too focused on short-term profits. And the FDIC's report also details problems with the regulator itself, highlighting staffing shortages it calls significant vacancies. New York State Department of Financial Services also acknowledges it also needs to hire more people to police the banks it supervises. And the FDIC says there was a breakdown in communication between regulators and the bank. Now, the FDIC says it's taken steps to fix these issues, but they're ongoing problems. And, Melissa, that's certainly worrisome as we've seen other lenders struggle in recent weeks, none more so than First Republic Bank of California.

BLOCK: Yeah, and speaking of First Republic, what about that? Are we about to see another bank go under?

GURA: That is looking more and more likely. First Republic is not in great shape. Today its shares closed at $3.50. Just a couple months ago, its stock price was about $150. Trading was so volatile this week, Melissa, the New York Stock Exchange halted trading several dozen times. Now, in the latest earnings report on Monday, First Republic said it lost more than a hundred billion dollars worth of deposits in March. That is almost half the deposits it had.

And that number really caught Wall Street by surprise. Investors thought the situation at that bank was bad but not that bad. And First Republic says deposits have stabilized, thanks in part to a huge cash infusion from 11 of the biggest banks in the U.S. and also thanks to help from the Fed, but investors are still not convinced First Republic has a viable future. Its bread and butter is, to put it simply, mortgages for rich people. And because interest rates have gone up, mortgages across the board have lost a lot of value. So these assets, these mortgages they have on their books, are not very attractive to potential buyers. And, Melissa, that leaves us waiting to see what happens - if First Republic is bought in whole or in part by a rival bank or if the government has to intervene.

BLOCK: And, David, are there fears of contagion? I mean, is this the start of another period of widespread banking turmoil?

GURA: Analysts I've talked to have said no. They've stressed we're in a different place than we were six weeks ago, and First Republic Bank's predicament is unique. And I really want to stress that point. Other rival banks have also reported earnings this week, and they actually sounded a pretty positive note. Yes, there was this fear that customers would take their money elsewhere to bigger banks, and indeed some of them did that. But many executives at midsized regional lenders told investors that exodus was not as bad as they feared it would be. A lot of them said they worked hard to explain to their customers they're different from Signature Bank or Silicon Valley Bank. And as a result, many of their customers stuck with them, Melissa, and by and large, the deposits have stabilized.

BLOCK: And, Scott Horsley, let me turn back to you for the last word. What happens now if we're thinking about policy changes?

HORSLEY: Well, there is going to be some political squabbling. Democratic Senator Elizabeth Warren cheered the Fed's call for tougher bank regulation, but Republican Senator Tim Scott says other well-run banks shouldn't be punished because of what he calls the unique failures at these two institutions. A lot of the changes the Fed is talking about can be done without Congress, but it would take an act of Congress to make changes to the nation's deposit insurance system. Both these banks had a lot of uninsured deposits, and we expect to see some policy ideas on that from the FDIC next week.

BLOCK: OK. NPR's Scott Horsley and David Gura. Thanks to you both.

HORSLEY: You're welcome.

GURA: Thank you. Transcript provided by NPR, Copyright NPR.

Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.
David Gura
Based in New York, David Gura is a correspondent on NPR's business desk. His stories are broadcast on NPR's newsmagazines, All Things Considered, Morning Edition and Weekend Edition, and he regularly guest hosts 1A, a co-production of NPR and WAMU.
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