After 2023 Bank Failures—Here’s Our Roadmap for Improving Bank Oversight

When Signature Bank and Silicon Valley Bank failed in 2023, they marked two of the largest bank failures in U.S. history. Some worried that other banks might fail too and that regulators had not done enough to prevent these and future failures.

Today’s WatchBlog post looks at our new reports about gaps in bank oversight and the actions needed to reduce the risk of future failures. 

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What were the signs that federal regulators missed?

Years before the actual failures, there were signs that Silicon Valley Bank and Signature Bank weren’t doing well. As early as 2019, federal regulators identified risky practices at the banks. Rapid growth was seen at both banks. They both also relied on less stable funding, such as uninsured deposits. And federal regulators saw that these banks weren’t effectively managing external risks (for example rising interest rates) to their holdings. 

But while federal regulators saw these signs, we found that their actions either came too late or didn’t work. For example,

• At Silicon Valley Bank, the Federal Reserve System (the Fed) voiced concerns in August 2021. But it did not initiate enforcement actions until a year later and it was unable to take additional action before the bank failed in March 2023.
   
• At Signature Bank, the Federal Deposit Insurance Corporation (FDIC) raised concerns in 2022. But it similarly did not initiate enforcement actions until March 11, 2023—the day before the bank failed.

Banking regulators like the Fed and FDIC help ensure that banks operate in a safe and sound manner by conducting on-site examinations of each bank they supervise. But when action isn’t taken to respond to risks like those seen at Signature and Silicon Valley banks, it puts banks at risk of failure. Because of this risk, we made recommendations to the Fed to improve the escalation of enforcement actions.

The failures also raise questions about what other steps regulators can take to ensure that banks take prompt action.

What more is needed to monitor banks and prevent future failures?

While federal regulators are tracking some signs of risky behaviors, their efforts could be improved to limit bank failures. And there are also additional warning signs they could track.

Adopting additional triggers. The regulators use capital triggers, like capital ratios below certain thresholds, to determine when a bank is in danger of failing. But capital triggers tend to lag behind other indicators of bank health, like liquidity and risk-management practices. For example, we found that Silicon Valley Bank and Signature Bank had strong capital measures in 2022 before they failed in 2023. Using noncapital measures could give banks more time to address financial health issues before they fail. We recommended that Congress require regulators to adopt noncapital measures that could signal risks and help identify actions need to prevent banks from failing. We also recommended that the Federal Reserve finalize a rule intended to promote earlier remediation of issues at financial institutions.

Tracking regulator concerns. At the end of each examination, regulators share their findings with banks and highlight any potential concerns. But we found inconsistencies in these efforts across federal regulators. For example, while the Fed and Office of the Comptroller of the Currency tracked their concerns across banks, FDIC did not. This means that FDIC may miss early signs of risky practices across banks. Tracking and sharing concerns across banks in a centralized way could help FDIC identify risks earlier.

Unified approach to curb certain risky behaviors. Regulators closely monitor banks to help ensure they avoid risky behaviors. But, as we’ve seen, that’s not always the case. So, what else can regulators do?

In 2010, federal regulators were tasked with writing rules for compensation that would disincentivize bank executives from making certain high-risk, high-reward decisions. However, regulators have not finalized them because of differing perspectives on the best ways to discourage inappropriate risk taking. We think regulators should continue their efforts and made recommendations that they do so as soon as possible.

Learn more about our work on bank oversight by checking our key issue page on financial markets and institutions.

• GAO’s fact-based, nonpartisan information helps Congress and federal agencies improve government. The WatchBlog lets us contextualize GAO’s work a little more for the public. Check out more of our posts at GAO.gov/blog.
   
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