Business Law

CDFPI and Federal Agency Reports Following Bank Failures

On May 8, 2023, the California Department of Financial Protection and Innovation (CDFPI) released a report related to its supervision of Silicon Valley Bank (SVB).  The CDFPI report follows reports by the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), and the United States Government Accountability Office (GAO), respectively, related to the supervision and regulation of Signature Bank and SVB.

The CDFPI Report notes that although most supervisory letters to SVB were jointly issued by the Federal Reserve Bank of San Francisco (FRBSF) and the CDFPI, the FRBSF had assumed the lead oversight role over many supervisory activities. The CDFPI Report concluded that the agency did not take adequate measures to ensure that identified deficiencies were timely remediated by SVB.  According to the report, the CDFPI plans to require banks to consider how to manage risks posed by social media and real-time withdrawals. The report also outlines steps that the CDFPI can take to improve its supervision of California state-chartered banks, including reviewing its internal staffing processes to ensure that additional staff is assigned in a timely manner for banks with assets of more than $50 billion, commensurate with accelerated growth or increased risk profile for an institution, and adding another level of supervisory review to exam reports before they are issued.  In addition, CDFPI will increase its focus on banks’ uninsured deposit levels and expect banks, in particular those with total assets over $50 billion, to have a plan for understanding and managing uninsured deposits.

The FRB’s report into SVB’s failure begins with a note from Vice Chair for Supervision Michael Barr, who provides his view on potential supervisory and regulatory changes to strengthen the resiliency of the banking sector.  The FRB report’s takeaways relate to risk management, Federal Reserve supervisory practices, and the potential impact of changes to law and the regulatory framework.  Vice Chair Barr’s cover letter provides a window into the expected supervisory and regulatory agenda for the federal banking agencies.

The FDIC’s report on the supervision of Signature Bank notes a number of causes for the bank’s failure, including its own supervisory practices.  In this regard, the FDIC report contains contributing factors including: (i) delays in supervisors communicating examination results to the bank board and management, and (ii) delays in the assignment of rating downgrades.  In addition, the FDIC Report highlights that resource challenges contributed to “timeliness and work quality issues and slowed earlier identified and reporting of [the bank’s] weaknesses.”  In a separate FDIC report published on May 1, 2023, the FDIC discussed options for deposit insurance reform.  That report suggests that targeted coverage where “business payment accounts” receive significantly higher coverage than other accounts may be the best option to achieve the objectives of deposit insurance (i.e., promotion of financial stability and protection of depositors from loss) relative to its costs.  Such targeted insurance coverage would require a legislative change.

Finally, the GAO report reviewed the failures of SVB and Signature Bank.  In general, the GAO report’s findings, with respect to the bank failures, were consistent with those of the FRB and FDIC reports.  In addition, the GAO report reviewed the use of the systemic risk exception to guarantee all uninsured deposits of these banks, and the establishment the Bank Term Funding Facility, an emergency lending facility established pursuant to section 13(3) of the Federal Reserve Act.

Taken together, these reports signal a change in the regulatory and supervisory agenda of the various banking agencies (both federal and state).  One key area of analysis appears to be understanding the role of digital technology in deposit runs.  Changes to regulations often take years because of required procedures under the Administrative Procedure Act.  However, changes to supervisory practices, including decisions regarding the allocation of agency resources and staff, can occur much more quickly.

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