For release on delivery
9:10 a.m. EST
February 16, 2024
Supervision with Speed, Force, and Agility
Remarks by
Michael S. Barr
Vice Chair for Supervision
Board of Governors of the Federal Reserve System
at
The Annual Columbia Law School Banking Conference
New York, New York
February 16, 2024
Thank you to Columbia University and the organizers for the opportunity to speak
today.1 It has been nearly a year since the sudden failure of Silicon Valley Bank (SVB)
and ensuing turmoil in the banking system, events which prompted important questions
about how banks manage risks and how we at the Federal Reserve supervise that risk-
taking. It is a fitting time to share some reflections on the importance of the day-to-day
work of bank supervision and the steps we are taking to improve the speed, force, and
agility of supervision.
Review of Silicon Valley Bank
Let me begin by summarizing my review of the failure of Silicon Valley Bank.
This was the first major bank failure since the Global Financial Crisis, and it necessitated
a deep, unflinching review of what went wrong. So, following the failure, Chair Powell
and I determined that it would be appropriate for me to lead a review on the conditions
that led to SVB's failure.
Experienced and well-respected staff from around the Federal Reserve System
who were not involved in SVB's supervision
conducted the review. The review found
that, first and foremost, the bank's management failed to manage the bank's
risks, and its
board failed to oversee management.2 But the review also found that Federal Reserve
supervisors did not identify issues quickly enough, and when we did identify risks, we
were too slow to act with sufficient force to change management behavior.
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The SVB report identified the need to improve the speed, force, and agility of
supervision to align with the risks, size, and complexity of supervised banks. To do this,
the report identified several areas of focus, including intensifying supervision at the right
pace, encouraging timely supervisory action and escalation, and improving agility of
supervision. We are taking many steps to strengthen supervision, some of which have
immediate influence on our work and some which will bear fruit over the long term.
The Goal of Supervision
Let me start by explaining the goals and benefits of supervision. The mission of
bank supervision is to promote a safe, sound, and efficient banking system to support a
strong economy.3 As I have spoken about many times before, banks play a critical role in
the economy by providing deposit products, credit, and other financial services to
individuals and businesses. The nature of banking-and the interconnectedness of the
system-pose vulnerabilities to individual banks and to the banking system. Deposit
insurance and other forms of governmental support help to protect depositors, banks, and
the broader economy, but also add to moral hazard, in that banks do not internalize the
full costs of their risks. Regulation and supervision help to make it more likely that
banks manage their risks prudently given the costs that their failure can pose on society,
and that banks have the capacity to support the economy through good times and bad.
Through regulation, the Federal Reserve Board sets the minimum requirements
for banks.4 These regulations require banks to have systems to manage their risks, and to
3
For more on bank supervision, please see the Federal Reserve's website at:
https://www.federalreserve.gov/supervisionreg/understanding-federal-reserve-supervision.htm
4
In this speech, references to "banks" includes banks, as well as their holding companies. Bank holding
companies constitute the largest segment of institutions supervised by the Federal Reserve, but the Federal
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maintain capital and liquidity in light of those risks. Regulations are tiered depending on
bank risks, with the larger, more complex banks subject to more stringent requirements.
We need to get regulation right, so that the baseline level of resilience in the system is
strong enough. The requirements set in regulation, however, may not be sufficient for
banks with activities or profiles that are different from or are riskier than a typical bank.
Supervision helps to fill in these gaps.
a supervisor's job is to evaluate a
Supervisors do not manage banks. Instead,
bank's material risks in light of its operations, and to help make sure that the bank has
sufficient governance and controls, capital, and liquidity to operate their firm, both in
normal times, and in stressful ones. Supervisors focus on the unique risks of the bank
and also bring perspectives of risk across similar firms in the banking system. These two
complementary perspectives help supervisors to identify and prioritize key areas of risk
and to focus management's attention on addressing the most important issues.
The goal of supervision is not to prevent all bank failures. In a market economy,
poorly run firms should go out of business. Similarly, the goal of supervision is not to
tell a bank that its business model may not work; the market will do that. The goal is to
help bank managers and boards focus their attention on weaknesses in their risk
measurement and management practices, compliance with law, and the sufficiency of the
bank's capital and liquidity resources given its risk profile. Proactive supervisory action
Reserve also supervises state member banks, savings and loan holding companies, foreign banks operating
in the United States, and other entities. The Office of the Comptroller of the Currency (OCC) and the
Federal Deposit Insurance Corporation (FDIC) also supervise national banks and state nonmember banks,
respectively. State banking agencies also supervise state-chartered banks.
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helps firms address issues before they grow so large as to threaten the bank, and earlier
intervention means that firms may have more options to fix their problems.
to mitigate systemic risk. A bank's failure can lead to
Supervision can also help
broader instability in the banking system by imposing direct credit losses on other banks,
and if the failing bank is forced to sell assets in a fire sale, depressing prices and leading
to additional losses at banks holding those same types of assets. Bank risks can cascade
through the financial system because of these types of interconnectedness. Contagion
from a failing bank can also happen when it is not clear to market participants and
depositors whether other banks have similar risks that have not yet fully come to light.
Inadequate capital, insufficient liquidity, weak risk management practices, and even
cybersecurity failures can not only harm individual banks, but also threaten the stability
of the system as a whole. Through supervision, we attempt to focus the most attention
and apply heightened standards to firms with the greatest potential to pose systemic risk.
But knowing in advance which firms may pose systemic risk is not an exact science.
The Benefits of Supervision
There is strong evidence that supervision has significant benefits for individual
Economic research on supervision's impact
banks, as well as the entire banking system.
shows that more intensively supervised banks are safer and no less profitable than their
peers.5 Supervisory enforcement actions have been shown to result in reduced risk
through decreased leverage and safer loan portfolios.6 Of course, there are costs of
5
Beverly Hirtle and Anna Kovner, "Bank Supervision,"
Annual Review of Financial Economics 14 (2022):
39-56.
6
Allen N. Berger, Jin Cai, Raluca A. Roman, and John Sedunov, "Supervisory Enforcement Actions
Against Banks and Systemic Risk,"
Journal of Banking and Finance 140 (July 2022).
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supervision on a bank, and supervision is most effective when its intensity is
proportionate to the risks the bank poses to the financial system.
More broadly, more intensively supervised banks have less volatile income and
lower loan losses, especially during periods of stress, precisely when the risk of
contagion is heightened.7 Since weakness in the banking system can amplify economic
downturns, actions that promote stronger banks during such times bring benefits that
extend well beyond individual banks and the banking system. American households and
businesses depend on banks, and on bank supervisors, to help to ensure banks are
operating safely and soundly.
referred to a "macroprudential
Taken up a level, a systemwide perspective-often
perspective"-is critical for understanding risks to financial stability and thus to the
banking system's ability to provide critical lending, payments, and intermediation
services to consumers and businesses. It is an important complement to the
"microprudential" supervision of individual banks.
Speed, Force, and Agility of Supervision
Since SVB's failure, we have focused on improving the
speed, force, and agility
of supervision, as appropriate to the situation. This means that supervisors take timely
action as risks build up; that supervisors deploy supervisory tools and escalation
effectively; and that supervisors are able to take account of changes in market, economic,
and financial conditions, both to reprioritize examination activity as well as to draw
supervisory conclusions based on new and different patterns of risks.
7
Beverly Hirtle, Anna Kovner, and Matt Plosser, "The Impact of Supervision on Bank Performance,"
Journal of Finance 75, no. 5 (2020): 2,765-2,808.
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In all cases, supervisory action must be appropriate to the situation. Because
supervision is often uniquely specific to an individual institution, the necessary response
should depend on the nature and extent of the risk, size and complexity of the institution;
its role in the financial system; and the potential for fire sales, cascades, or contagion.
And of course, our findings must be grounded in fact, credible, and consistent with the
law. Supervision should also strive to be efficient in the sense of getting the desired
supervisory intensity at the lowest cost to supervisors and banks, to the extent practicable
and consistent with the overarching objectives of a resilient banking system.
The past year has been busy for Federal Reserve supervisors. The banking system
is sound and resilient, and supervisors have been on the frontlines to help ensure it
Supervisors have brought their understanding of individual banks'
remains that way.
operations and strategy and an understanding of local conditions to assess bank risk. We
also have focused on the macro-prudential, systemic perspectives, to form an
understanding of the condition of the banking system broadly. And supervisors have
worked closely with banks to improve the resilience of banks so that they can effectively
serve their customers and provide credit to the economy.
Let me now walk through our efforts over the past year.
Intensifying Supervision at the Right Pace
As noted in the SVB report, supervision should intensify at the right pace as a
bank grows in size and complexity. Much of the build-up of risk at SVB occurred while
the firm was supervised within the regional bank program, which covered firms with
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assets between $10 billion and $100 billion.8 Based on this experience, for large and
more complex regional banking organizations, including firms that are growing rapidly,
firm's condition, strategy, and risk management more frequently,
we are assessing such a
and deepening our supervisory interactions the firm. At the same time, smaller and less
complex firms will see little difference from the current state.
In addition, we have been working to introduce more coordination between the
regional bank and large bank supervisory programs. As a regional bank grows in size
and complexity, the firm's management should firm's ability to
be investing in the
manage its risk, so that the firm's capabilities are growing commensurately with the
firm's
risk. If this happens, application of standards for larger banks should not require
significant changes in a firm's risk management capabilities
because the bank should
have been making these investments along the way. So for regional banks that are
approaching the $100 billion threshold, we are working to improve coordination between
supervisory teams and to share the range of practices at large banking organizations just
over the $100 billion threshold. The goal is that the transition to heightened supervision
for fast-growing banks is more of a gradual slope and not a cliff. For large banking
organizations, we are planning to conduct more horizontal, or cross-firm supervisory
examinations, to put our assessment of an individual bank in context and improve the
consistency in how we look across banks.
8
Prior to SVB's collapse, firms with assets of less than $100 billion were supervised using approaches
developed for community banking organizations, and supervisory engagement with the firm was limited to
an annual examination and targeted examinations as needed.
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Timely Supervisory Action and Escalation
As noted in the SVB report, once issues are identified, they should be addressed
more quickly, both by banks and supervisors. Over the past year, supervisors have taken
many steps to better ensure that banks are appropriately managing their risks, including
interest rate risk and liquidity risk, and are prepared were they to experience stress.9
SVB failed in part because of its mismanagement of interest rate and liquidity
risks. While SVB was an outlier in many ways, its failure focused attention on other
banks in the system with large unrealized losses and high concentrations of uninsured
deposits. Examiners have been conducting additional targeted examinations for firms
with large unrealized losses or other vulnerabilities. During these exams, we engage
extensively with the banks to understand the firm's financial and operational health. And
we work closely with our state regulatory partners; they provide important insights into
the banks and the banking environment, and we value their continued partnership.
Where there are weaknesses in how firms are managing these risks, examiners are
requiring firms to take steps to address these weaknesses and encouraging them to bolster
their capital position, reduce their liquidity risk, or mitigate their interest rate risk, as
appropriate. For a small number of banks with a risk profile that could result in funding
pressures for the firm, supervisors are continuously monitoring these firms.
9
See, e.g., Board of Governors of the Federal Reserve System, Supervision and Regulation Report,
(Washington: Board of Governors, November 2023),
https://www.federalreserve.gov/publications/files/202311-supervision-and-regulation-report.pdf; and Board
of Governors of the Federal Reserve System, Supervision and Regulation Report (Washington: Board of
Governors, May 2023),
https://www.federalreserve.gov/publications/files/202305-supervision-andregulation-report.pdf.
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Let me turn to supervision of a specific risk: commercial real estate (CRE). The
reduced demand for office space and higher interest rates have put pressure on some CRE
valuations, particularly in the office sector. Supervisors have been closely focused on
banks' CRE lending in several ways: how banks are measuring their risk and monitoring
the risk, what steps they have taken to mitigate the risk of losses on CRE loans, how they
are reporting their risk to their directors and senior management, and whether they are
provisioning appropriately and have sufficient capital to buffer against potential future
CRE loan losses.
Stepping back, because of the heightened risk environment and heightened
supervisory attention, the Federal Reserve has issued more supervisory findings and
downgraded firms'
supervisory ratings at a higher rate in the past year. In addition, we
have increased our issuance of enforcement actions. These actions do not represent a
change in policy; they reflect the impact of the changing economic, interest rate, and
financial environment on a bank's financial resources. We want and expect supervisors
to help banks focus adequate attention on the areas that matter most for the particular
bank, whether that is interest rate risk, CRE, or cybersecurity vulnerabilities, to name a
few.
As noted in the SVB report, we continue to evaluate whether we should
temporarily require additional capital or liquidity beyond regulatory requirements where
the firm has trouble in managing its risks. Higher capital or liquidity requirements can
serve as an important safeguard until risk controls improve, and they can focus
management's attention on the most critical issues. Other supervisors use these types of
tools, and we can draw from these experiences as we consider what may be appropriate
for our supervised banks.10
Improving the Agility of Supervision
Another area of focus has been to improve the agility of supervision. Supervisors
must be able to make judgments on a forward-looking basis built on imperfect
information, while remaining fair, evidence-based, and consistent. In the case of SVB,
supervisors delayed action to gather more evidence even as weaknesses were growing.
SVB's
This delay meant problems persisted past the time when it had options to address
them, and those problems got worse.
Drawing from this experience, we have been looking to enhance our supervisory
programs so that we correctly balance a strong process with the need to act based on
imperfect information, and tools that speed up and strengthen the consequences for
supervisory findings. As I mentioned previously, supervisors do not manage firms; they
communicate to firms where there are weaknesses in firm practices and escalate those
concerns where appropriate. So here, supervisors should be issuing supervisory findings
in a timely way, focusing on the important issues, aligning findings with the severity of
the issue, and communicating findings to firms clearly. Once supervisory findings are
institutions'
communicated, supervisors should appropriately assess supervised
remediation of findings, and when the firm fails to adequately address issues, escalate
findings in a timely way to more stringent actions. As part of this effort, we are working
10
Regulators in Europe and the UK impose additional capital and liquidity buffer requirements on firms
through their Pillar 2 framework. In addition, the OCC's framework enables the OCC to impose higher
individual minimum capital requirements (IMCRs) via an enforcement action. See 12 C.F.R. 3.403.
on our enforcement processes to provide consistency and the appropriate speed, force,
and agility in the recommendation, development, and escalation of enforcement actions.
In addition, we are working to improve our processes for identifying potential
developments or trends in risk that could negatively affect individual banking firms or the
banking system, and better connecting this analysis to supervision. Where risks are
emerging, this analysis may help to bolster the basis for forward-looking supervisory
assessments. Where risks are underappreciated, the analysis may help to challenge
supervisors' assessments and foster meaningful action.
It is also critical that we look beyond the risks we see today to keep the banking
system strong and resilient into the future. Supervisors should be encouraged to consider
a range of potential shocks and vulnerabilities, so that they think through the implications
unlikely
of "tail" events with severe consequences. Most people are skilled at pattern
detection, but often have trouble contemplating the consequences of events outside of our
historical experience. It is important to find ways to break these strictures and think more
critically about scenarios that could lead to acute distress at firms. This requires us to
have the right tools, expertise, and supervisory approaches for a given firm and
environment.
Conclusion
The Federal Reserve's bank supervisory function is integral to a safe and sound
banking system. And just as the banking system changes, the Fed's supervision must
change and adapt with it. We need to continuously explore new models of financial risk.
We should bring together multiple perspectives to challenge supervisory judgments and
build organizational frameworks that institutionalize this practice. And we must
appropriately adjust supervision when we see changes at a firm or in the financial sector,
especially in these times of great innovation and technological change.
But we also must be humble about our challenges; the failure of Silicon Valley
Bank one year ago revealed our own failures. It showed that in some cases, such as when
banks grow rapidly or take on new risks, that supervision can lack the speed, force and
agility required to keep up with those changes. Since that time, we have been hard at
work to address those issues. And while this work will take time, I am committed to
getting the job done properly. Supervisors around the Federal Reserve System have
stepped up to the challenge, and I am grateful for their continued good work.
Thank you, and I'm happy to answer questions.