Observations for Federal Reserve Oversight

This section outlines policy and implementation issues that could be considered to enhance the Federal Reserve's oversight program in order to promote the safety and soundness of individual financial institutions and the stability of the financial system. They are informed by recent events related to SVBFG and SVB, but they are not meant to be narrowly reactive to the specific combination of vulnerabilities and shocks that led to the failure of SVBFG. Rather, the SVBFG experience offers an opportunity for a broad assessment of how Federal Reserve oversight functions in theory and in practice.

Lessons Learned from Earlier Bank Failures

Following the Global Financial Crisis in 2008 and 2009, the Federal Reserve Board conducted an evaluation of how it carries out its regulatory and supervisory responsibilities. That review contributed to fundamental changes to the oversight of the largest, most systemically important institutions. For example, SR letter 12-17 set out a new framework for the consolidated supervision of large financial institutions that was designed to both enhance the resiliency of banks to lower the probability of failure and to reduce the impact on the broader economy in the event of failure or distress.

It is instructive to review the lessons learned from that evaluation. An internal, non-final report entitled "Enhancing the Effectiveness of Supervision"168 outlined several issues that are pertinent to the SVBFG experience:

  • supervisors did not provide a comprehensive picture of large firms' vulnerabilities;
  • a realization that financial institutions of all types were more vulnerable to a rapid erosion in market liquidity than was recognized;
  • historical focus on firm-specific risks rather than systemic issues;
  • experience with rapid growth in size and complexity that might not be appropriately managed under existing prudential standards;
  • supervisors who identified deficiencies but did not always demand swift corrective action or hold managers accountable when deficiencies were identified and communicated; and
  • too little focus on low probability/high severity events.

Similarly, the Federal Reserve Bank of New York (FRBNY) commissioned an external review to draw on lessons learned from the Global Financial Crisis and make recommendations to the FRBNY.169 The non-final report, Report on Systemic Risk and Bank Supervision, focused on systemic risk issues but also had relevant insights for bank supervision that link to the SVBFG experience:

  • a focus on recognition of risks rather than actions;
  • an observation that banks' internal risk-management processes were sometimes ineffective and trumped by profit pressures;
  • an excessive risk aversion and deference from supervisors, particularly during profitable periods;
  • a shift toward reviewing risk processes rather than the risk itself;
  • misaligned incentive compensation frameworks;
  • delay from a consensus-driven culture that smooths over complex issues;
  • a focus on relative rather than absolute assessments; and
  • a need for independent analysis to challenge supervised firms.

These reviews focused on the largest, most systemically important firms, which are now supervised as part of the LISCC program. The fact that smaller institutions such as SVBFG can drive systemic disruptions suggests that one might consider lessons from these reviews and development of the LISCC portfolio for a broader range of firms where distress could have systemic implications.

These reviews after the Global Financial Crisis had a significant impact on the structure of supervision in the Federal Reserve System, but both were conducted and circulated largely within the Federal Reserve and never formally completed.

The Federal Reserve's Office of Inspector General (OIG) is required to complete a review of the agency's supervision of a failed institution when the projected loss to the Deposit Insurance Fund is material. In 2011, the OIG reviewed 35 state member bank failures that occurred between 2009 and 2011 to identify common themes related to the cause of failure and the role of Federal Reserve supervision.170

While the driving force behind these small bank failures was largely related to asset quality and economic deterioration, some findings echo the SVBFG experience:

  • management pursuing robust growth exceeded the banks' risk management and funding strategies;
  • strategic choices that proved to be poor decisions; and
  • incentive compensation programs that inappropriately encouraged risk taking.

Moreover, the OIG noted that many "examiners identified key safety and soundness risks, but did not take sufficient supervisory action in a timely manner to compel the Boards of Directors and management to mitigate those risks. In many instances, examiners eventually concluded that a supervisory action was necessary, but that conclusion came too late to reverse the bank's deteriorating condition."171

Issues for Consideration

This report identified a number of issues relevant for how the Federal Reserve designs and implements its supervisory and regulatory program. As discussed throughout the report, the failure of SVBFG reflects a complex interaction of many factors, some of which were idiosyncratic to the management and business model of SVBFG and how oversight was executed, while others were broader, with the potential to impact the effectiveness of the oversight program.

The observations are organized around four broad themes: (1) enhance risk identification, (2) promote resilience, (3) change supervisor behavior, and (4) strengthen processes. The ideas are meant to be feasible in that they fall within the Federal Reserve's existing authorities and support the Federal Reserve's existing mandates. These are not full-fledged proposals and are not intended as a checklist of specific actions. Rather, they represent ideas that may warrant further consideration by policymakers based on observations related to the failure of SVBFG and broader environmental changes, such as technological innovations that impact the pace of financial flows. Many options involve difficult trade-offs that must be considered carefully by policymakers; e.g., a more forceful oversight program may increase resilience but may also add burden or hinder financial intermediation.

Enhance Risk Identification

A foundational piece of any risk-management framework is the ability to identify material risks. This is true for both firms and for supervisors, and a substantial portion of risk management is dedicated to effective risk identification.

The SVBFG experience shows that weak risk identification can have severe consequences: SVB failed to identify its true liquidity risk and interest rate risk, and supervisors failed to appreciate how those shortcomings created a much more vulnerable firm in the current economic and financial environment. Supervisors can reconsider what types of foundational exams are most relevant for firms of all sizes to ensure appropriate identification of risks.

Supervisors can also consider how to develop a more robust understanding of the risks banks face and how those might be evolving with the economic, financial, and technological environment. For example, a "portfolio entrance exam" as firms grow quickly and prepare for heightened supervisory standards would allow supervisors to make informed judgments more quickly. This is particularly true for some smaller institutions with distinctive business models where traditional metrics are potentially less relevant. More detailed data on depositor concentration and net stressed liquidity positions through a review of liquidity would provide greater insight into liquidity risk and possible depositor dynamics in the current environment. A reassessment of the drivers of systemic risk could facilitate development of a stronger tailoring regime that reflects the current economic environment and the drivers of systemic impact.

Promote Resilience

The goal of risk management is not to eliminate risk but to understand risks and to control them within well-defined and appropriate risk tolerances and risk appetites. From society's perspective, resilient firms are more likely to provide financial services across a range of potential outcomes, and prudential oversight helps mitigate well-known market failures that might lead the private sector to under-invest in resilience. This is a question about how much ex ante self-insurance against extreme events is required and ultimately reflects policymaker objectives.

The need for resilience is particularly important in periods of rapid change and heightened uncertainty when shocks can materialize in unexpected ways, such as the unprecedented pace of deposit flows. As indicated in the previous reviews mentioned above, rapid growth itself is often a sign of increased risk where additional oversight and mitigants are needed. The supervisory and regulatory program could consider ways to promote resilience of firms with well-identified, material risk-management weaknesses, rapid growth, or substantive business model changes. This could be through, for example, higher capital or liquidity buffers or activity restrictions. By contrast, SVBFG had a long runway to meet higher standards even as it was growing rapidly.

To further strengthen resilience, supervisors could consider a number of specific steps. Stronger incentives to manage risk effectively linked to compensation or activity restrictions could further align private and social objectives for a safe and sound banking system. Requirements for stronger operational capacity to access alternative forms of funding in stress could help cushion shocks. Supervisors could reconsider how to best reflect interest rate risk in regulatory capital assessments.

Change Supervisor Behavior

Supervision requires consequential judgments about issues that directly impact individual firms and the broader financial system. These judgments must be forward-looking and are necessarily made with imperfect information, particularly in the case of potential tail events with systemic consequences, but also must be fair, evidence-based, and consistent. The SVBFG experience suggests a supervisory program that was overly focused on oversight requirements rather than the underlying risks. In some cases, significant risks were treated by SVBFG more as a process to fix than as a clear and present threat to the viability of a firm.

The supervisory record on SVBFG shows a focus on consensus-building and a perceived need to form ironclad assessments about what had already gone wrong and less on judgments with a more open mind about what could go wrong. This hesitancy to move decisively is particularly difficult to overcome during periods of strong economic growth and business performance. To complement the more structured stress testing program, supervisors could also engage in narrative-based "pre-mortem" exercises or reverse stress testing to think critically about idiosyncratic scenarios and tail events that could lead to acute distress at individual firms.

This experience also suggests an opportunity to shift the culture of supervision toward a greater focus on inherent risk, and more willingness to form judgments that challenge bankers with a precautionary perspective. Individual examiners and supervisors often identified core issues but then failed to take collective action. This could include additional training and portfolio rotations to better understand a range of perspectives. Moreover, supervisors in other jurisdictions have developed approaches based in behavioral science that incorporate data on institutional attitudes and norms related to risk factors, such as complacency, overconfidence, short-term focus, and lack of effective challenge that can reveal institutional blind spots and contribute to vulnerabilities like those seen at SVB.172 The Federal Reserve could investigate these tools through a pilot program.

Strengthen Processes

The report shows a complex oversight program that involves multiple categories, triggers, phase-in periods, rule sets, runways, and supervisory expectations. This complexity has evolved with the complexity of the banking sector and is undoubtedly warranted in parts, but it is also an impediment to both firms and their supervisors as they navigate through a challenging rule set with discrete cliff effects.

A simpler and stronger oversight program and tailoring framework could be both more efficient and more effective. For example, greater clarity on portfolio expectations, well-defined internal governance over ratings, an explicit supervisory plan for firms transitioning between portfolios, and reduced complexity of the regulatory structure could shift some bandwidth at both supervised firms and the Federal Reserve away from the supervisory process and more toward understanding and effectively managing the fundamental risk itself. Supervisors could also systematically elevate focus on long-dated, material issues to promote more rapid remediation.


These considerations reflect initial observations drawn from a review of the failure of SVBFG and SVB. Further development and consideration will require careful discussion of trade-offs, costs and benefits, potential unintended consequences, and practical implication issues.

The goal of such an exercise is to learn the general lessons from this particular experience and to help meet the Federal Reserve's safety and soundness objectives across a wide range of potential risks.




 168. Board of Governors of the Federal Reserve System, Enhancing the Effectiveness of Supervision, April 2010 (draft). Return to text

 169. David Beim and Christopher McCurdy, "Report on Systemic Risk and Bank Supervision" (New York: FRBNY, August 2009), Draft, https://fcic-static.law.stanford.edu/cdn_media/fcic-docs/2009-08-05%20FRBNY%20Report%20on%20Systemic%20Risk%20and%20Supervision%20Draft.pdfReturn to text

 170. Board of Governors of the Federal Reserve System, Office of Inspector General, "Summary Analysis of Failed Bank Reviews" (Washington: Board of Governors, September 2011), 1, https://oig.federalreserve.gov/reports/Cross_Cutting_Final_Report_9-30-11.pdfReturn to text

 171. Board of Governors of the Federal Reserve System, Office of Inspector General, Summary Analysis of Failed Bank Reviews (Washington: Board of Governors, September 2011), 1, https://oig.federalreserve.gov/reports/Cross_Cutting_Final_Report_9-30-11.pdfReturn to text

 172. See, e.g., Australian Prudential Regulation Authority, "Transforming Governance, Culture, Remuneration and Accountability: APRA's Approach," APRA (2019), https://www.apra.gov.au/sites/default/files/Transforming%20governance,%20culture,%20remuneration%20and%20accountability%20-%20APRA%E2%80%99s%20approach.pdf; Australian Prudential Regulation Authority, "No Room for Complacency on Bank Risk Culture," APRA (2022), https://www.apra.gov.au/news-and-publications/no-room-for-complacency-on-bank-risk-culture; "Culture and Behaviour Risk Guideline," Office of the Superintendent of Financial Institutions, last modified February 28, 2023, https://www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/gdn-ort/gl-ld/Pages/cbrsk_dft.aspx#:~:text=OSFI%27s%20Culture%20and%20Behaviour%20Risk%20Guideline%20is%20principles-based,scope%2C%20complexity%20of%20operations%2C%20strategy%2C%20and%20risk%20profile; Central Bank of Ireland, Behaviour and Culture of the Irish Retail Banks (Dublin: Central Bank of Ireland, July 2018), https://www.centralbank.ie/docs/default-source/publications/corporate-reports/behaviour-and-culture-of-the-irish-retail-banks.pdf?sfvrsn=2; De Nederlandsche Bank, Supervision of Behaviour and Culture(Amsterdam: De Nederlandsche Bank, 2015), https://www.dnb.nl/media/1gmkp1vk/supervision-of-behaviour-and-culture_tcm46-380398-1.pdf; De Nederlandsche Bank, Moving from Reflex to Reflection (Amsterdam: De Nederlandsche Bank, January 2023), https://www.dnb.nl/media/chhehw04/moving-from-reflex-to-reflection.pdf; Monetary Authority of Singapore, "Culture and Conduct Practices of Financial Institutions," Monetary Authority of Singapore (2020), https://www.mas.gov.sg/-/media/MAS/MPI/Guidelines/Information-Paper-on-Culture-and-Conduct-Practices-of-Financial-Institutions.pdf; Financial Stability Board, Guidance on Supervisory Interaction with Financial Institutions on Risk Culture (Basel: FSB, April 2014), https://www.fsb.org/wp-content/uploads/140407.pdf; Financial Stability Board, Strengthening Governance Frameworks to Mitigate Misconduct Risk: A Toolkit for Firms and Supervisors (Basel: FSB, April 2018), https://www.fsb.org/wp-content/uploads/P200418.pdfReturn to text

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Last Update: May 17, 2023