Observations for Federal Reserve Oversight 97
Change Supervisor Behavior
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See, e.g., Australian Prudential Regulation Authority, “Transforming Governance, Culture, Remuneration and Accountabil-
ity: APRA’s Approach,” APRA (2019), https://www.apra.gov.au/sites/default/files/Transforming%20governance,%20
culture,%20remuneration%20and%20accountability%20-%20APRA%E2%80%99s%20approach.pdf; Australian Prudential
Regulation Authority, “No Room for Complacency on Bank Risk Culture,” APRA (2022), https://www.apra.gov.au/news-
and-publications/no-room-for-complacency-on-bank-risk-culture; “Culture and Behaviour Risk Guideline,” Office of the
Superintendent of Financial Institutions, last modified February28, 2023, https://www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/
gdn-ort/gl-ld/Pages/cbrsk_dft.aspx#:~:text=OSFI%27s%20Culture%20and%20Behaviour%20Risk%20Guideline%20
is%20principles-based,scope%2C%20complexity%20of%20operations%2C%20strategy%2C%20and%20risk%20profile;
Central Bank of Ireland, Behaviour and Culture of the Irish Retail Banks (Dublin: Central Bank of Ireland, July2018),
https://www.centralbank.ie/docs/default-source/publications/corporate-reports/behaviour-and-culture-of-the-irish-retail-
banks.pdf?sfvrsn=2; De Nederlandsche Bank, Supervision of Behaviour and Culture (Amsterdam: De Nederlandsche
Bank, 2015), https://www.dnb.nl/media/1gmkp1vk/supervision-of-behaviour-and-culture_tcm46-380398-1.pdf;
De Nederlandsche Bank, Moving from Reflex to Reflection (Amsterdam: De Nederlandsche Bank, January2023),
https://www.dnb.nl/media/chhehw04/moving-from-reflex-to-reflection.pdf; Monetary Authority of Singapore, “Culture
and Conduct Practices of Financial Institutions,” Monetary Authority of Singapore (2020), https://www.mas.gov.sg/-/
media/MAS/MPI/Guidelines/Information-Paper-on-Culture-and-Conduct-Practices-of-Financial-Institutions.pdf; Financial
Stability Board, Guidance on Supervisory Interaction with Financial Institutions on Risk Culture (Basel: FSB, April2014),
https://www.fsb.org/wp-content/uploads/140407.pdf; Financial Stability Board,Strengthening Governance Frame-
works to Mitigate Misconduct Risk: A Toolkit for Firms and Supervisors (Basel: FSB, April2018), https://www.fsb.org/
wp-content/uploads/P200418.pdf.
Supervision requires consequential judgments about issues that directly impact individual firms
and the broader financial system. These judgments must be forward-looking and are necessarily
made with imperfect information, particularly in the case of potential tail events with systemic
consequences, but also must be fair, evidence-based, and consistent. The SVBFG experience
suggests a supervisory program that was overly focused on oversight requirements rather than the
underlying risks. In some cases, significant risks were treated by SVBFG more as a process to fix
than as a clear and present threat to the viability of a firm.
The supervisory record on SVBFG shows a focus on consensus-building and a perceived need
to form ironclad assessments about what had already gone wrong and less on judgments with
a more open mind about what could go wrong. This hesitancy to move decisively is particularly
difficult to overcome during periods of strong economic growth and business performance. To
complement the more structured stress testing program, supervisors could also engage in narra-
tive-based “pre-mortem” exercises or reverse stress testing to think critically about idiosyncratic
scenarios and tail events that could lead to acute distress at individual firms.
This experience also suggests an opportunity to shift the culture of supervision toward a greater
focus on inherent risk, and more willingness to form judgments that challenge bankers with a
precautionary perspective. Individual examiners and supervisors often identified core issues but
then failed to take collective action. This could include additional training and portfolio rotations to
better understand a range of perspectives. Moreover, supervisors in other jurisdictions have devel-
oped approaches based in behavioral science that incorporate data on institutional attitudes and
norms related to risk factors, such as complacency, overconfidence, short-term focus, and lack of
effective challenge that can reveal institutional blind spots and contribute to vulnerabilities like
those seen at SVB.
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The Federal Reserve could investigate these tools through a pilot program.