Report: Regulators Saw Problems, But Didn’t Make Silicon Valley Bank Fix Them Fast Enough

When state and federal regulators spotted problems at Silicon Valley Bank, they didn’t do enough to make sure the bank acted quickly to fix them. That’s one of the key takeaways from a report published today by the California state department that shared responsibility for overseeing the bank, which failed in March. 

The report came from California’s Department of Financial Protection and Innovation, which, among other responsibilities, works with federal regulators to oversee state banks. Some of that oversight happens in the form of bank “exams,” where government workers go in and investigate a bank’s solvency, management and more. 

In the case of Silicon Valley Bank, California was sharing oversight with the Federal Reserve Bank of San Francisco. The Fed had “assumed a lead role for many supervisory activities,” the report said. 

In years leading up to the bank’s collapse, California and federal regulators had “identified deficiencies” in the bank’s management practices and had taken action in their capacity as bank supervisors related to the bank’s “risk management, liquidity, and interest rate risk simulations,” the report said. The bank had begun to remediate those issues, but “the regulators did not take adequate measures to ensure SVB did so with enough speed,” the report said. 

The report outlined steps the Department of Financial Protection and Innovation could take to protect against “future economic destabilization,” including:

  • Work with federal regulators to come up with better, faster systems for making banks fix problems; 
  • Prioritize regulation efforts on banks with more assets, and staff up oversight teams if banks grow quickly – as Silicon Valley Bank did;
  • Increase scrutiny of uninsured deposits; 
  • Tell banks to come up with a better way to handle social media, a key element in the speed of Silicon Valley Bank’s bank run. 

“The Federal Reserve played the lead role (in overseeing Silicon Valley Bank) and, as we knew, did a negligent job of addressing problems in SVB that it identified,” wrote Ross Levine, a banking and finance professor at UC Berkeley’s Haas School of Business, in an email to CalMatters. There were lots of federal and state regulators focused on Silicon Valley Bank, “and yet they collectively did not understand the magnitude of the interest rate risk even though it was obvious. Each person seemed to do their job within the context of their little inspection box. Yet, collectively, they missed the big, obvious problem staring them all in the face.”

State lawmakers will get a chance to ask questions on Wednesday when they hold an oversight hearing on Silicon Valley Bank’s collapse. Officials from the state Department of Financial Protection and Innovation are expected to give remarks and answer questions. 

“I do want to be clear that SVB failed because the bank’s leadership failed and they didn’t properly manage the risk,” said Tim Grayson, a state assemblymember from Concord and the chair of the assembly’s committee on banking and finance.

As for how much responsibility state regulators have for the ultimate demise of the bank, that’s something legislators will have to look at during the upcoming hearing, he said. 

“My focus now heading into this Wednesday hearing is how to prevent a similar situation from happening again,” Grayson said. “And what that really means for me is being able to take a fresh look at bank supervision and whether or not our state regulator has everything that it needs to protect California, at least California’s banking system.”

The report comes on the heels of the collapse of First Republic, another California bank. First Republic’s customers had begun pulling their money out before Silicon Valley Bank failed, and then customers withdrew even more money in the ensuing panic. On May 1, the state department said that it had taken possession of First Republic and handed it over to federal regulators, who subsequently sold it to JP Morgan Chase Bank.

Different banks have different regulators depending on whether the bank has a state charter or a national charter; charters are like a business license for a financial institution. Banks with a state charter, like Silicon Valley Bank and First Republic, are regulated by both California and the federal government. Other banks, including Bank of America or JP Morgan Chase, have national charters and are regulated primarily by the federal government. Banks can choose which charter to seek.

Federal regulators also bear some responsibility in Silicon Valley Bank’s collapse, as the Federal Reserve acknowledged in its own extensive post-mortem report recently. The bank’s federal supervisors “did not fully appreciate the extent of the bank’s vulnerabilities, or take sufficient steps to ensure that the bank fixed its problems quickly enough,” wrote Michael Barr, the Fed’s vice chair for supervision in a letter accompanying the report.  

Click here to read the full article in CalMatters

Silicon Valley Bank Employees Received Bonuses Hours Before Government Takeover

Silicon Valley Bank employees received their annual bonuses Friday just hours before regulators seized the failing bank, according to people with knowledge of the payments.

The Santa Clara, California-based bank has historically paid employee bonuses on the second Friday of March, said the people, who declined to be identified speaking about the awards. The payments were for work done in 2022 and had been in process days before the bank’s collapse, the sources said.

This year, bonus day happened to fall on SVB’s final day of independence. The institution, in the throes of a bank run triggered by panicked venture capital investors and startup founders, was seized by the Federal Deposit Insurance Corporation (FDIC) around midday Friday.

On Friday, SVB CEO Greg Becker addressed workers in a two-minute video in which he said that he no longer made decisions at the 40-year-old bank, according to the people.

The size of the payouts couldn’t be determined, but SVB bonuses range from about $12,000 for associates to $140,000 for managing directors, according to Glassdoor.com.

SVB was the highest-paying publicly traded bank in 2018, with employees getting an average of $250,683 for that year, according to Bloomberg.

Click here to read the full article in CNBC

Carney on ‘Kudlow’: Silicon Valley Bank’s Failure Signals the End of the ‘Cheap Money Ecosystem’ Fueling CA Tech Start-Ups

The “cheap money ecosystem” that fed the tech start-up culture has come to an end with the Federal Reserve raising interest rates to curb inflation, and the failure of Silicon Valley Bank might be the first domino to fall among California-based financial institutions, Breitbart Economics Editor John Carney said in an interview Friday with Fox Business host Larry Kudlow.

“The sudden implosion of Silicon Valley Bank (SVB) is sending shock waves through the financial system and the technology sector,” Carney wrote in Friday’s Breitbart Business Digest. “SVB plays a central role in the start-up economy of San Francisco. According to Bloomberg, it does business with about half of venture capital backed start-up firms in the U.S.”

“One of the problems [for SVB] was when money was so freely available to all these start-ups, they didn’t borrow a lot,” Carney told Kudlow. “So, they had a ton of deposits coming in and not a lot of opportunity to make loans out to people. I mean, yeah, you can lend money so people can buy a yacht or a fancy mortgage on some tech start-up billionaire’s fancy mansion, but they really had way too much money. So, they invested it in bonds. Bank of America I think has 25 percent of its assets in bonds, but this bank had over 50 percent of its assets in bonds.”

Kudlow noted that when the yield curve inverted, these bonds incurred a negative return.

“They’re losing money,” Carney agreed. “And at the same time, all these start-ups who are depositing so much money there are now withdrawing it because they don’t have access to free money anymore. So, they’re withdrawing it just to pay their bills. So, you’re having the deposits go down. They have to sell into a market where they are actually producing real losses, not just mark to market losses.”

“That is what sparked the panic basically,” he continued. “Earlier this week, [SVB] announced something like a $2 billion loss on their assets. And people said, ‘I better get my money out quickly.’”

“Now the FDIC stepped in to avoid an old-fashioned run on the bank,” Kudlow said.

The bank went into receivership on Friday when the California Department of Financial Protection and Innovation shuttered it, and the Federal Deposit Insurance Corporation (FDIC) issued a statement guaranteeing the accounts of all insured depositors. However, as Carney told Kudlow, this will not be reassuring to the depositors of the reportedly 93 percent of SVB deposits that are uninsured.

“There are people who are at risk of losing their deposits at least on paper,” Carney said.

All of this has been exacerbated by the Federal Reserves’ rate-hiking fight against inflation, which has signaled the end of the cheap lending low interest rate monetary policy that fostered Silicon Valley start-ups, Carney explained.

“I think we’re going to see a lot of the California-based financial institutions get into trouble because they were so dependent on this very cheap money ecosystem that was feeding start-up culture and is no longer there,” he said.

“What happens to the start-up culture now that there’s no cheap money or there’s no cheap, cheap money?” Kudlow asked. “[Are] they’re going to have trouble getting loans?”

“Absolutely,” Carney said. “They’ll have trouble getting loans and have trouble raising money because if you can get five percent on a treasury bond, why are you trying to get 10 percent on a very risky start-up? You’re not going to do that. You might as well just double down on leverage and get a treasury. So, I think that they’re going to have a lot of trouble being able to continue to raise money. And we’re going to see a lot of the start-ups start to tilt over.”

Kudlow asked Carney about the risk that this bank failure will spread beyond SVB.

“I think there’s a high risk that it spreads,” he said. “People are right now looking at every other bank, not the big banks—the JP Morgans, Citigroups, Wells Fargos, they’ll be fine.”

“The banking system is extremely well capitalized,” he added. “And so, I don’t think we’re on the verge of a financial crisis. But I do think we’ll probably have a couple more bank failures ahead of us.”

Click here to read the full article at BreitbartCA

Helping the ‘Unbanked’: California Mulls Entering Banking Business to Serve Disadvantaged Consumers

Anneisha Williams figures she has paid several hundred dollars in overdraft fees over the years, so when her last bank recently refused to refund about $500 a hacker stole from her checking account, Williams decided she was done with banks. 

Williams, 38, works full-time at a Jack-in-the-box in the Los Angeles area and is an in-home care provider. She also is raising six children; she doesn’t have time to hassle with a bank she no longer trusts, she said. 

“They told me they couldn’t refund my money, basically, that it was just a loss,” she said. “It was just highway robbery.” 

Now Williams does banking online through a financial tech company. It doesn’t charge her monthly fees and offers her free overdraft protection. But state law says such companies aren’t banks and can’t call themselves that. 

Williams has joined California’s “unbanked” — some 7% of Californians who don’t have checking or savings accounts at traditional banks. 

Another 18% have bank accounts but end up using higher-fee financial services, such as payday lenders or check-cashing businesses. They are considered the  “underbanked,” according to banking experts.

In total, 1 in 4 Californians lacks full access to banks, studies say. Many are low-income and minorities who pay high fees to access their cash.

Lawmakers say they’re preparing to help. The state Legislature passed a law in 2021 creating a commission to explore a public banking option called CalAccount. Its report is due to the Legislature July 1, 2024.

CalAccount would be a state-run public bank, but the state would likely involve another bank or financial partner. It would offer such services as free checking, overdraft protection, ATM cards and savings accounts to people who are underserved by banks, state officials said.

Assemblymember Miguel Santiago, a Democrat from Los Angeles who authored the law, said it  would bring back into the economy people pushed out by high financial fees.

Financial options

“We can’t create a stable economy when financially underserved households spend an average of 10% of their take-home pay in fees and interest, just to access their own money and pay bills,” Santiago said.  “Creating a public option for banking and closing the racial wealth gap isn’t only a moral imperative, but it also creates greater financial security for all of our communities.”

CalAccounts would offer “a voluntary, zero-fee, zero-penalty, federally insured transaction account,” says the California Public Banking Option Act. People could access their accounts in person at post offices, rather than at bank branches.

California has one of the highest concentrations of unbanked families in the nation, according to the Federal Reserve. Workers earning less than $15 per hour make up 81% of unbanked individuals in the state, a study said

The Federal Deposit Insurance Corp., which regulates banks, says to be unbanked means no one in a household has a checking or savings account at a traditional bank or credit union. Underbanked means they have a bank account but still lack access to many financial services, such as credit cards and loans. 

Not enough cash

Critics of CalAccounts say there aren’t enough of the unbanked or underbanked to justify a state-run financial alternative. Many Californians don’t lack access to bank services, they said; they just lack cash.

“This is a critical distinction that must be made; individuals who utilize payday lenders and other high-cost loan products do so because they have inadequate cash flow, not because they lack access to banking services,” a coalition of business and banking groups wrote to legislators. 

Other experts voiced misgivings about public banking. 

James Hamilton, an economics professor at University of California San Diego, said where a public bank gets its money to lend and how transparent it is will be important. A public banking system could mask lending practices that deserve public oversight, he said.

“Expenditures of taxpayer dollars should be approved by the legislature and open to public review,” he said. “If the bank’s loans were funded entirely with legislatively approved allocations of tax revenue, I would have no problem with it. But if they are funded by borrowing, this can mask the losses and procrastinate handing the ultimate bill to taxpayers. 

“That is how the federal student loan program became a trillion-dollar public loss. California should not repeat the same mistake.” 

Banking on minorities 

Being unbanked greatly impacts people of color and low-income families. Nearly 1 in 2 Black and Latino households in California is unbanked or underbanked, state officials said.

One reason: low-income consumers are often burdened by bank fees that others with higher balances don’t have to pay. Black households are almost 2 times more likely to pay overdraft fees than white households, and Latino households are 1.4 times more likely, says a study by the Roosevelt Institute, a liberal think tank. 

In 2021, 11% of U.S. adults with bank accounts paid at least one overdraft fee, but 20% of Black and 14% of Latino account holders paid such fees, according to the Federal Reserve

Banks charge overdraft fees — typically around $35 — for each transaction. Some banks charge a single customer multiple times for the same error and charge them each day their account remains overdrawn, the Roosevelt Institute said. 

Frequent overdrafters generate about half of banking companies’ checking account profits, according to a 2020 study by the global consulting firm Oliver Wyman. Overdraft-related fees generated $17 billion for banks in 2019, and among the 25 largest banks, about 9% of annual pre-tax profits.

Due to public pressure, some banks in 2021 reduced fees. But by third quarter the fees were back up and banks collected $11 billion that year, the Roosevelt Institute said. 

Add that to what unbanked customers pay check cashers and payday lenders and Californians are losing hundreds of millions of dollars a year in fees, Santiago said. 

Customer service test

Julia, a 61-year-old McDonald’s employee in Richmond, Calif., said her bank takes a $12 fee from her account every month her balance is below $1,500. 

“That $12 is important,’ said Julia, who did not disclose her last name because she fears deportation as an undocumented immigrant. “For a poor person, every single dollar is important. We have to pay for lights, gas, trash service, and buy food. You have to work two or three jobs just to get by.” 

Online banking through a financial tech company, like Williams did, is an option. But those companies aren’t registered banks. They often partner with banks to offer their services. And some have attracted hundreds of complaints.

If the state operates a public bank, people could get their paychecks, public assistance benefits and tax returns directly deposited, proponents say.  

This option may be years away, however. After bank industry lobbying, lawmakers amended the public banking bill. Instead of creating a bank, the bill created a Blue Ribbon commission to conduct a market analysis to determine if it’s feasible. 

So far that commission has held few meetings. It is just beginning the process of hiring a market analysis consultant. 

Meanwhile state and federal governments should more actively regulate banking and protect consumers, wrote Emily DiVito, author of The Roosevelt Institute’s report.

To back that up, her study includes research purporting to show how staff at some California banks treat minority or low-income customers.

Researchers posed as potential customers and went to 80 bank branches, requesting information about opening accounts. Bank staff turned away minority canvassers nearly a third of the time, DeVito wrote, but turned away white canvassers once out of 23 visits.

The staff gave various reasons: customers needed to make appointments, staff was too busy or at lunch, or relevant information about bank accounts was on the bank’s website.

Click here to read the full article CalMatters

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