By San Francisco Federal Reserve Bank President Mary Daly has stated that she had limited involvement in the oversight of Silicon Valley Bank, which collapsed in March, leading to stress in the U.S. banking system and the subsequent failure of two other banks.
Daly faced considerable backlash following the bank’s collapse, with members of Congress criticizing her due to the fact that Silicon Valley Bank’s chair, Gary Becker, had previously served on the board of directors of the San Francisco Fed.
According to an internal report by the Fed, Silicon Valley Bank’s collapse was attributed to mismanagement by the bank. During the pandemic, the bank experienced rapid growth as venture-capital funding poured into the tech sector and households received stimulus checks. However, the bank suffered losses as a result of investing in low-yielding securities, compounded by the Fed’s series of interest rate hikes since 2022.
During an interview on CNBC, Daly was questioned about her awareness of the weak management practices at Silicon Valley Bank. In response, she stated that she was intentionally not involved in day-to-day supervision of banks in her district, as this was standard practice. According to Daly, ultimate responsibility lies with the Fed’s board of governors in Washington.
While regional Fed banks do have teams assigned to supervise banks within their districts, these teams ultimately report to the Fed’s board in Washington. This approach, Daly explained, serves to insulate her from day-to-day supervision and maintains a clear chain of responsibility.
“I am ring-fenced, rightfully so, from the day-to-day operations of supervision,” Daly clarified.
The Evolving Role of the Federal Reserve
In a recent interview, Mary Daly, President of the Federal Reserve Bank of San Francisco, addressed the challenges faced by Silicon Valley Bank and the implications it had for the broader banking system in the United States. While acknowledging that the collapse of Silicon Valley Bank highlighted the need for better risk management, Daly emphasized that the incident also revealed an important feature of the system.
According to Daly, treating all banks equally, regardless of their geographic location, is a fundamental principle that ensures fairness and stability within the banking industry. She stressed the importance of identifying emerging risks and called for increased dialogue between regional bank presidents and the Federal Reserve’s bank supervision team in Washington. This, she argued, would enable regulators to proactively address potential issues before they escalate.
One of the key findings from the Fed’s internal review was the lack of prompt action when vulnerabilities were identified. Daly concurred with this conclusion, highlighting the importance of taking forceful measures to rectify problems quickly. It is essential to prevent a systemic crisis and maintain confidence in the banking system.
To mitigate concerns of contagion in the banking system, the Fed established a lending program, allowing banks to access loans to prevent deposit flight. Collectively, banks have borrowed $102 billion through this program. However, there is still apprehension regarding other banks holding devalued securities due to higher interest rates. This has raised concerns about a potential credit crunch, which could negatively impact the economy.
Daly remains cautiously optimistic about credit tightening, stating that it is currently within the bounds of what is expected in a normal slowing economy. However, she cautioned that the true impact may take time to manifest and advised against premature reassurances. Until this fall, when sufficient data is available, it is prudent to remain vigilant and closely monitor lending activity.
The interview shed light on the evolving role of the Federal Reserve in managing risks within the banking system. Daly’s insights emphasize the importance of robust risk management, effective communication, and swift action to ensure stability and prevent future crises.
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