Less than two years before Federal Reserve Chairman Jerome Powell cited systemic risk as justification for bailing out Silicon Valley bank depositors, Powell approved the same bank’s merger proposal, insisting that the new, larger institution posed no significant threat for the entire financial system to documents reviewed by The Lever.
“SVB Group management has the experience and resources to ensure the combined organization operates safely and soundly,” Federal Reserve officials wrote in June 2021 as they discussed the $900 million acquisition of Boston Private Bank and Trust approved by the company. “The organization would not be a critical service provider or so connected to other businesses or markets that it would pose a significant risk to the financial system in the event of a financial emergency.”
All six members of the Federal Reserve Board approved the merger.
But when a financial emergency struck 20 months later, the Federal Reserve Board, along with the Federal Deposit Insurance Corporation, voted unanimously to assert the rare systemic risk exemption and gave the government the power to guarantee Silicon Valley Bank’s uninsured deposits . The FDIC only insures up to $250,000 in each customer’s deposits, and more than 90 percent of SVB deposits were reportedly uninsured as of late 2022.
On Monday, the Federal Reserve announced it would review its oversight of the bank ahead of its collapse.
“Events surrounding the Silicon Valley bank require a thorough, transparent and expeditious review by the Federal Reserve,” Powell said in a statement.
Fed Vice Chairman Michael Barr added, “We must show humility and conduct a careful and thorough review of how we have overseen and regulated this firm and what we should learn from this experience.”
Powell’s record deregulation of SVB
Powell supported SVB’s application for merger approval, despite warnings from a major shareholder about the transaction, arguing that SVB was grossly overvalued and facing headwinds.
The Fed’s support for the SVB merger — and the claim that the bank would not pose systemic risk — followed Powell leading or sanctioning other deregulation moves that may have enabled the SVB’s rapid collapse.
Under Powell, the Fed sided with banking lobbyists in 2019 and introduced an “adjustment rule” that relaxed supervision of banks the size of the SVB, including by removing liquidity requirements, reducing the size and frequency of stress tests, and the ability for these banks to opt out of reporting expected losses.
The following year, Powell moved to exempt banks’ venture capital investments from the Volcker Rule, which aims to prevent government-insured banks from using deposits to invest in risky assets.
The SVB, which made significant venture capital investments, had been pushing for this exception even before the Volcker Rule came into force in 2015. The Federal Reserve had separately approved a five-year extension for the SVB to comply with the Volcker Rule in 2017.
Deregulation aside, the Federal Reserve was also the primary agency tasked with monitoring the bank and spotting red flags.
“The Fed has much more and better knowledge, information, expertise and access to banks than short sellers, rating agencies and the media, but they all seem to have done a much better job than the Fed in identifying the very serious risks at SVB,” the non-profit organization Better Markets said in a statement calling for an independent investigation into the central bank’s behavior in the run-up to the SVB’s collapse.
The Federal Reserve Bank of San Francisco was the main regulator of the SVB. Gregory Becker, CEO of SVB, was elected to the San Francisco Fed’s Board of Directors in 2019 as one of the bank representatives. He left the board last Friday.
Sen. Elizabeth Warren (D-Mass.) said that given his role in creating the conditions for the bank’s collapse, Powell should not be involved in the Fed’s review of the SVB’s oversight.
“Fed Chair Powell’s actions in allowing big banks like Silicon Valley Bank to increase their profits by taking risks have directly contributed to these bank failures,” Warren said in a statement Tuesday.