For Fed supervision, cultural shortcomings are nothing new

By  Kyle Campbell

Last month’s Federal Reserve report on the failure of Silicon Valley Bank has put the policy objectives of former Vice Chair for Supervision Randal Quarles back under the microscope. Many factors contributed to what was then the second-largest bank failure in U.S. history, according to the report, but one finding, in particular, places blame directly at Quarles’s feet. Though he is not named in the report, it states that his office directed a shift in supervisory practices that made supervisors reluctant to elevate issues and take decisive action against banks…Karen Petrou, managing partner of Federal Financial Analytics, has a less hardlined view on the Fed’s future as a regulator, but she agrees that the primacy of monetary policy making within the organization has contributed to its supervisory weaknesses. Petrou said supervisors are rarely blindsided by failures; it’s more the case that the regulators identify critical issues that go unchecked. For Fed-supervised banks, she blames this disconnect on supervisors receiving insufficient support from leadership. “Supervisors need to be rewarded for and given the tools, which they don’t have, to cut problematic action short,” she said. “What we see constantly in supervision is a negative feedback loop in which banks fail to do what they’re told and sometimes even double down to try and do as much of what’s making them money as fast as they can before they think they have to stop.”