Michael S Barr: Supervision with speed, force, and agility

Speech by Mr Michael S Barr, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, at the Annual Columbia Law School Banking Conference, New York City, 16 February 2024.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Thank you to Columbia University and the organizers for the opportunity to speak today. 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. 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.

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. 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.