In September 18 remarks, Fed Vice Chair for Supervision Bowman detailed the initial findings of an independent review of the March 2023 failure of a California state-chartered commercial bank. The review was conducted by an independent advisory group and is the first in a planned series according to Bowman.

The vice chair highlighted seven key findings from the report, including that: (i) the bank’s failure was precipitated by a “confluence of vulnerabilities,” including unrealized accounting losses exceeding capital, a deposit base that was 94 percent uninsured and “concentrated in” venture-capital-backed technology companies, and a lack of operational readiness to borrow from the Fed’s discount window; (ii) Fed supervisory staff knew, or should have known, about the purported vulnerabilities as early as March 2022; (iii) Fed supervisory staff did not take action to reduce the bank’s interest rate risk or concentration of vulnerabilities; (iv) delays in supervisory action were not caused by the regulatory tailoring mandate in the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, nor by the former vice chair for supervision; (v) a culture of risk aversion at the Fed was a significant factor contributing to supervisory inaction; (vi) the “divorcing of responsibility, authority, and accountability” contributed to this risk-averse culture; and (vii) social media did not trigger the bank run, despite many postmortem accounts asserting this view, according to the advisory group’s report.

In response, Bowman emphasized that the Fed has already taken steps to address certain “shortcomings” cited in the report, pointing to the issuance of a new statement of supervisory operating principles in May (previously covered by InfoBytes here). The vice chair claims this new statement reorients the objectives of supervision away from focusing “excessively” on procedural or documentation issues toward promptly identifying and responding to threats to safety and soundness and financial stability. Bowman also noted that examination teams will now submit monthly reports identifying where examiners were uncertain about whether the standard for supervisory action was met in order to give leadership increased visibility and give teams clearer guidance.