WASHINGTON — As U.S. regulators prepared to announce an extraordinary government rescue of depositors at Silicon Valley Bank and Signature Bank on Sunday, officials from the Biden administration pushed to formally spotlight shortcomings in financial regulation that they blamed for the banks’ rapid descent to insolvency, according to several people involved in or close to the discussions.
But Jerome H. Powell, the chair of the Federal Reserve, blocked efforts to include a phrase mentioning regulatory failures in the joint statement released early Sunday evening by the Fed, the Treasury Department and the Federal Deposit Insurance Corporation.
Government officials raced through the weekend to decide how to protect the financial system against the failure of Silicon Valley Bank, and the back and forth underlined a tension in the discussions. Some administration officials wanted to include that lapses in bank regulation and supervision had contributed to the problems that helped fell the bank.
Mr. Powell pushed to take the line on regulation out of the statement because he wanted to focus on the actions being taken to shore up the financial system, according to a person familiar with that matter. Those steps included ensuring that no depositors at Silicon Valley Bank would lose their money and setting up a new program from the Fed to provide loans that could help the banking system at a challenging moment.
In the end, the statement spoke only of regulation in positive terms, referring to laws and regulatory changes enacted after the 2008 financial crisis that were meant to increase oversight of banks.
“The U.S. banking system remains resilient and on a solid foundation, in large part due to reforms that were made after the financial crisis that ensured better safeguards for the banking industry,” it read. “Those reforms combined with today’s actions demonstrate our commitment to take the necessary steps to ensure that depositors’ savings remain safe.”
Still, questions remain about the Fed’s oversight of Silicon Valley Bank, and on Monday, the central bank announced that it would carry out a review of the bank’s supervision and regulation.
“The events surrounding Silicon Valley Bank demand a thorough, transparent and swift review by the Federal Reserve,” Mr. Powell said in the news release.
Whether the regulation of Silicon Valley Bank was adequate has become a point of heated political discussion since its demise, with powerful lawmakers including Senator Elizabeth Warren, Democrat of Massachusetts, arguing that lax banking rules and deregulation under the Trump administration helped lead to the problems in the banking system.
Congress passed a law to lighten rules for small and midsize banks in 2018. Though many Democrats signed on to the legislation, some have remained skeptical of it — and particularly of how the Fed went about implementing the rollbacks.
The Fed implemented the changes under the watch of Randal K. Quarles, then the central bank’s vice chair for supervision. Mr. Quarles also shifted the tone on day-to-day bank supervision at the Fed, insiders and outsiders have said, making it less intense and more predictable.
Mr. Powell, who was chair at the time, voted for the Fed’s decisions — and some Democrats, including Ms. Warren, hold him responsible for the changes. He has said publicly that he defers to the supervisory vice chair on regulatory matters. Mr. Quarles has since left the central bank, and its new vice chair, Michael S. Barr, is leading the Fed’s review of bank supervision. The Fed will release the results on May 1.
Mr. Quarles’s moves on supervision were cited derisively by some participants in the discussions over how to protect Silicon Valley Bank depositors in Washington over the weekend, a person familiar with the talks said this week. They grumbled over a quote Mr. Quarles gave in 2018 to The Wall Street Journal, saying that changing bank supervision culture at the Fed “will be the least visible thing I do and it will be the most consequential thing I do.”
As Democrats focus on deregulation in the Silicon Valley Bank episode, some Republicans have focused more on the role of bank overseers at the Federal Reserve Bank of San Francisco. Others have loosely blamed the bank’s failure, without evidence, on the California lender’s commitments to workplace diversity and environmentally and socially conscious investments.
Many outside experts have suggested that the vulnerabilities at Silicon Valley Bank indicate that the Fed’s bank supervisors may have missed something — or at least failed to respond to it early and aggressively enough. But they have also pointed out that it is hard to prejudge what happened.
It is also difficult to nail down how much individual regulatory changes during the Trump administration mattered in the case of Silicon Valley Bank. But the firm’s demise has fueled calls for a careful review of whether large lenders that are not huge enough to be deemed globally systemic should still be subject to tighter rules — instead of the lighter ones the changes in 2018 and 2019 prescribed.
“Those rollbacks suggested that banks in this size range did not pose a threat to financial stability,” said Kathryn Judge, a financial regulation expert at Columbia Law School.
And President Biden, who reappointed Mr. Powell as Fed chair over the objections of Ms. Warren and other progressive Democrats, said on Monday that he would renew a call for tighter financial regulation.
“I’m going to ask Congress and the banking regulators to strengthen the rules for banks to make it less likely that this kind of bank failure will happen again, and to protect American jobs and small businesses,” he said.
