Five ways to stop banks from failing

WHEN BANKS COLLAPSE, the question always arises: Where were the supervisors?

- BILL DUDLEY

Time and again at Silicon Valley Bank (SVB), at Credit Suisse - they've failed in their responsibility to ensure the safety and soundness of both individual institutions and the broader financial system. Experts rightly say that the culture of supervision needs to change. I'd go further: The priorities and goals need work, too.

Let's start with culture, the subject of a recent report by a group of seasoned practitioners. All too often, supervisors hesitate to speak up and challenge bank leadership, even when vulnerabilities are obvious. Because their role isn't to manage the bank, they default toward errors of omission (delay and wait for more information) rather than errors of commission (forceful intervention).

US examiners should have pressed SVB to fill its vacant chief risk officer position quickly; reduce its interest rate risk exposure; and raise equity capital much sooner when rates rose and pushed the value of its securities holdings far underwater. Swiss examiners should have forced the Credit Suisse board to replace and reinvigorate senior management; develop a credible strategy to return to profitability; raise capital faster; and identify the root cause of the many scandals that ultimately precipitated the bank's failure.