San Francisco Fed Chair Mary Daly, whose district experienced the second-largest bank failure in U.S. history and has become the target of criticism, would not normally have been a key figure overseeing the Silicon Valley bank, several past and current Feds have said officials told CNBC.
A highly centralized design of the Fed’s oversight of large banks like SVB, with assets in excess of $100 billion, placed oversight under the staff and leadership of the Federal Reserve Board of Governors in Washington.
Regional Fed chairmen may have more or less involvement in oversight of their largest banks, these officials said, but key policy and enforcement decisions would have been made in Washington, not by Daly.
“She wasn’t in the chain of command,” a former Fed bank president told CNBC. “Surveillance actions by Fed staff in San Francisco would have been approved by Washington.”
Daly and Fed executives declined to comment on the report. The officials who spoke to CNBC asked for anonymity so they could speak openly on the issue.
Washington takes the lead
Regional bank presidents and supervisory staff directly oversee smaller community banks with assets under $100 billion.
But while auditors for big banks who work in the regional offices can be hired and fired by regional bank presidents, most of their reporting is overseen by the board in Washington.
The collapse of the SVB in early March sent shockwaves through the banking industry, raising fears of bank runs on mid-sized and small banks.
The data shows that hundreds of billions of dollars have flowed out of smaller banks, some going to larger banks, and hundreds of billions more are leaving the banking system and ending up in money market funds.
It raised significant questions about the Fed’s banking supervision and its failure to act more vigorously on issues it had previously identified, including a concentrated deposit base and mismanaged interest rate duration risk.
Both the House and Senate held hearings on the issue this week, with Republicans accusing Daly and the Bank of San Francisco of focusing more on climate change risk than financial risk.
“The San Francisco Fed focused on exploring left-wing politics in which it had absolutely no experience and ignored one of the most fundamental risks in the banking sector — interest rate risk,” said Republican Sen. Bill Hagerty of Tennessee.
Talk but do nothing
In response, Michael Barr, the Fed’s vice chairman for oversight, broadly acknowledged that the board was at the center of oversight, where local auditors reported to the board, saying, “The San Francisco Federal Reserve Bank’s auditors have these problems approached the board, called them to the bank … and these measures were not implemented in time.
The SVB experienced massive growth in 2020 and 2021, moving into the big banking organization category, where most of the oversight was handled by San Francisco Fed auditors, who reported primarily to Washington.
Mary Daly, President of the San Francisco Federal Reserve, reacts at the Los Angeles World Affairs Council City Hall on October 15, 2019, Los Angeles, California, USA.
Ann Sapphire | Reuters
A former Fed official said Washington sets the strike zone for banks by setting guidelines, and local auditors will determine whether the bank meets those policy requirements.
In the case of SVB, regulators have issued seven issues requiring immediate attention, or matters requiring immediate attention, related to liquidity and interest rate risk.
Officials said those MRAs or MRIAs were approved by Washington. In the summer of 2022, the bank’s rating was downgraded to “sufficient” and the governance was rated “deficit”.
The bank is not well managed and is subject to growth restrictions. It’s not known if prosecutors urged Washington to take tougher action.
However, regulators did not take any more stringent steps at their disposal, including fines, injunctions, or enforcement actions that would have been public.
conflict of interest
Former Fed officials interviewed by CNBC said they’ve experienced instances of frustration when they urged Washington to act faster or more forcefully on a bank, but their complaints had little effect.
It is not known if Daly urged Washington to take any action.
The SVB president sat on the San Francisco Fed board, and a Fed official said regional Fed presidents are barred from participating in oversight of members of their board.
But if the case was serious, Daly could have asked the SVB board to resign from the board, a former official said.
The failure of the SVB raises significant questions about the Fed’s supervisory structure: Should more powers be delegated to regional presidents? Does the Fed give enough priority to monetary policy at the highest level of supervision?
A former official told CNBC that Daly is unlikely to emerge blameless from the ongoing investigation.
But the official said she couldn’t be said to be making the key decisions related to the bank’s failure. A review of what went wrong is likely to point more to Washington, its regulatory bureaucracy, and board leadership than it does to San Francisco.
Clarification: Fed Vice Chairman Michael Barr was referring to the SVB’s board when he spoke of auditors taking problems with the bank to the “board”. A previous version was unclear at the reference. At a bank like SVB, local auditors are tasked with making day-to-day decisions based on a regulatory framework established by the Fed’s Board of Governors and consulting with board staff on follow-up decisions.