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Groupthink is an underlying regulatory driver of Silicon Valley Bank's failure

Updated: May 5, 2023

GROUPTHINK is on display as a key contributor to supervisory challenges and the Silicon Valley Bank ("SVB") failure. Groupthink defaults to a procyclical regulatory strategy. Procyclical regulation was identified as a key driver of the financial crisis. [i]

Vice Chair for Supervision Barr made telling comments about the SVB supervisory environment.

"In the interviews for this report, staff repeatedly mentioned changes in expectations and practices, including PRESSURE TO REDUCE BURDEN ON FIRMS, meet a higher burden of proof for a supervisory conclusion, and demonstrate due process when considering supervisory actions.
There was no formal or specific policy that required this, but staff felt a shift in culture and expectations from internal discussions and observed behavior that changed how supervision was executed."

- Michael S. Barr, Vice Chair For Supervision, The Federal Reserve System (All caps emphasis added)

Vice Chair Barr's comments point to the tell-tale signs of groupthink. "Culture and expectations from internal discussions" suggest an unofficial and groupthink-impacted decision structure "that change how supervision was executed." In terms of regulatory strategy, the impact of groupthink leads to an effective procyclical regulatory supervision approach. "Pressure to reduce burden on firms" reduces regulatory oversight during this time of economic expansion.

Groupthink commonly causes biased and ineffective group decision-making. Decision processes designed to overcome groupthink will:

  1. Explicitly enable a countercyclical regulatory strategy or, at least,

  2. Provide confidence the chosen regulatory strategy is not impacted by groupthink.

Disciplined and technology-supported decision process — whether in the bank, their board, or their regulator — is essential for the best decision-making environment and outcomes. We submit that regulatory strategy — whether countercyclical or other — should be intentional. Rather than a groupthink-impacted default.

The impact of groupthink, along with other decision challenges and solutions, are explored in the article:


[i] Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report, 2016


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