United States regulators have put large banks on notice that tougher oversight is coming, after the Federal Reserve and Federal Deposit Insurance Corp issued detailed reports on what went wrong and where their supervisors came up short in the run-up to the two biggest bank failures since the Great Financial Crisis.
On Friday, the US Fed issued a detailed and scathing assessment of its failure to identify problems and push for fixes at Silicon Valley Bank before the lender’s collapse and promised tougher supervision and stricter rules for banks.
“SVB’s failure demonstrates that there are weaknesses in regulation and supervision that must be addressed,” Barr said in a letter accompanying a 114-page report supplemented by confidential materials that are typically not made public.
“Our first area of focus will be to improve the speed, force, and agility of supervision,” he said. “Our experience following SVB’s failure demonstrated that it is appropriate to have stronger standards apply to a broader set of firms.”
Shortly after the release of the Fed’s report, the FDIC delivered a 63-page account of its failings in the collapse of New York-based Signature Bank and those of its management, to fix persistent weaknesses in liquidity risk management and overreliance on uninsured deposits. Both SVB and Signature failed last month.
“In retrospect, the FDIC could have acted sooner and more forcefully to compel the bank’s management and its board to address these deficiencies more quickly and more thoroughly,” it said.
Both reports said the banks’ managers were primarily to blame for prioritising growth and ignoring basic risks that set the stage for the failures.
And while they both identified supervisory lapses – the Fed’s report was particularly scathing – both stopped short of laying the responsibility for the failures at the feet of any specific senior leaders inside their oversight ranks.
Poor management
While it was the regional bank’s own mismanagement of basic risks that was at the root of SVB’s downfall, the Fed said, supervisors of SVB did not fully appreciate the problems, delaying their responses to gather more evidence even as weaknesses mounted, and failed to appropriately escalate certain deficiencies when they were identified.
At the time of its failure, SVB had 31 unaddressed citations on its safety and soundness, triple what its peers in the banking sector had, the report said.
One particularly effective change the Fed could make on supervision would be to put mitigants in place quickly in response to serious issues on capital, liquidity or management, a senior Fed official said.
Increased capital and liquidity requirements also would have bolstered SVB’s resilience, the Fed added.
Barr said as a consequence of the failure, the central bank will re-examine how it supervises and regulates liquidity risk, beginning with the risks of uninsured deposits.
It also said it would look at tying executive compensation to management’s addressing of supervisory weaknesses.
Before the twin failures in March, banking regulators had focused most of their supervisory firepower on the very biggest US banks that were seen as critical to financial stability.
The Fed’s report signalled that it will look to subject banks with more than $100bn in assets to stricter rules.
Regulators shut SVB on March 10 after customers withdrew $42bn on the previous day and queued requests for another $100bn the following morning.
The historic run triggered massive deposit outflows at other regional banks that were seen to have similar weaknesses, including a large proportion of uninsured deposits and big holdings of long-term securities that had lost market value as the Fed raised short-term interest rates.
New York-based Signature Bank failed two days later. Its failure, the FDIC said in its report which was released also on Friday, was caused by “poor management” and a pursuit of “rapid, unrestrained growth” with little regard for risk management.
Just as critically, the FDIC said it did not have enough staff to do the work of supervising the bank.
Since 2020, an average of 40 percent of positions in the FDIC’s large bank supervisory staff in the New York region were vacant or filled by temporary employees, the report said.
Signature lost 20 percent of its total deposits in a matter of hours on the day that SVB failed, FDIC Chair Martin Gruenberg has said.
Similar to SVB, Signature examiners reported weak corporate governance practices and failures by bank management to address shortcomings identified by supervisors, including the firm’s reliance on uninsured deposits.
Change in supervisory practices
The realisation that smaller banks are capable not only of causing ructions in the broader financial system but of doing it at such speed has forced a rethink.
“Contagion from the failure of SVB threatened the ability of a broader range of banks to provide financial services and access to credit for individuals, families and businesses,” Barr said. “Weaknesses in supervision and regulation must be fixed.”
In its report, the Fed said that from 2018 to 2021, its supervisory practices shifted and there were increased expectations for supervisors to accumulate more evidence before considering taking action. Staff interviewed as part of the Fed’s review reported pressure during this period to reduce burdens on firms and demonstrate due process, the report said.
From 2016 to 2022, as assets in the banking sector grew 37 percent, the Fed’s supervision headcount declined by 3 percent, according to the report.
As SVB itself grew, the Fed did not step up its supervisory game quickly enough, the report showed, allowing weaknesses to fester as executives left them unaddressed, even after staff finally did downgrade the bank’s confidential rating to “not well-managed”.
While the fallout from the failures of SVB and Signature has slowed, some firms are still feeling the effects. San Francisco-based First Republic Bank is struggling for survival after reporting this week that its deposit outflows after the SVB and Signature collapses exceeded $100bn.
TORONTO – Roots Corp. may have built its brand on all things comfy and cosy, but its CEO says activewear is now “really becoming a core part” of the brand.
The category, which at Roots spans leggings, tracksuits, sports bras and bike shorts, has seen such sustained double-digit growth that Meghan Roach plans to make it a key part of the business’ future.
“It’s an area … you will see us continue to expand upon,” she told analysts on a Friday call.
The Toronto-based retailer’s push into activewear has taken shape over many years and included several turns as the official designer and supplier of Team Canada’s Olympic uniform.
But consumers have had plenty of choice when it comes to workout gear and other apparel suited to their sporting needs. On top of the slew of athletic brands like Nike and Adidas, shoppers have also gravitated toward Lululemon Athletica Inc., Alo and Vuori, ramping up competition in the activewear category.
Roach feels Roots’ toehold in the category stems from the fit, feel and following its merchandise has cultivated.
“Our product really resonates with (shoppers) because you can wear it through multiple different use cases and occasions,” she said.
“We’ve been seeing customers come back again and again for some of these core products in our activewear collection.”
Her remarks came the same day as Roots revealed it lost $5.2 million in its latest quarter compared with a loss of $5.3 million in the same quarter last year.
The company said the second-quarter loss amounted to 13 cents per diluted share for the quarter ended Aug. 3, the same as a year earlier.
In presenting the results, Roach reminded analysts that the first half of the year is usually “seasonally small,” representing just 30 per cent of the company’s annual sales.
Sales for the second quarter totalled $47.7 million, down from $49.4 million in the same quarter last year.
The move lower came as direct-to-consumer sales amounted to $36.4 million, down from $37.1 million a year earlier, as comparable sales edged down 0.2 per cent.
The numbers reflect the fact that Roots continued to grapple with inventory challenges in the company’s Cooper fleece line that first cropped up in its previous quarter.
Roots recently began to use artificial intelligence to assist with daily inventory replenishments and said more tools helping with allocation will go live in the next quarter.
Beyond that time period, the company intends to keep exploring AI and renovate more of its stores.
It will also re-evaluate its design ranks.
Roots announced Friday that chief product officer Karuna Scheinfeld has stepped down.
Rather than fill the role, the company plans to hire senior level design talent with international experience in the outdoor and activewear sectors who will take on tasks previously done by the chief product officer.
This report by The Canadian Press was first published Sept. 13, 2024.
VANCOUVER – Mediated talks between the union representing HandyDART workers in Metro Vancouver and its employer, Transdev, are set to resume today as a strike that has stopped most services drags into a second week.
No timeline has been set for the length of the negotiations, but Joe McCann, president of the Amalgamated Transit Union Local 1724, says they are willing to stay there as long as it takes, even if talks drag on all night.
About 600 employees of the door-to-door transit service for people unable to navigate the conventional transit system have been on strike since last Tuesday, pausing service for all but essential medical trips.
Hundreds of drivers rallied outside TransLink’s head office earlier this week, calling for the transportation provider to intervene in the dispute with Transdev, which was contracted to oversee HandyDART service.
Transdev said earlier this week that it will provide a reply to the union’s latest proposal on Thursday.
A statement from the company said it “strongly believes” that their employees deserve fair wages, and that a fair contract “must balance the needs of their employees, clients and taxpayers.”
This report by The Canadian Press was first published Sept. 12, 2024.
MONTREAL – Travel company Transat AT Inc. reported a loss in its latest quarter compared with a profit a year earlier as its revenue edged lower.
The parent company of Air Transat says it lost $39.9 million or $1.03 per diluted share in its quarter ended July 31.
The result compared with a profit of $57.3 million or $1.49 per diluted share a year earlier.
Revenue in what was the company’s third quarter totalled $736.2 million, down from $746.3 million in the same quarter last year.
On an adjusted basis, Transat says it lost $1.10 per share in its latest quarter compared with an adjusted profit of $1.10 per share a year earlier.
Transat chief executive Annick Guérard says demand for leisure travel remains healthy, as evidenced by higher traffic, but consumers are increasingly price conscious given the current economic uncertainty.
This report by The Canadian Press was first published Sept. 12, 2024.
