The US Federal Reserve has published its review of the failure of Silicon Valley Bank (SVB). The review was managed by Fed Vice Chair for Supervision Michael Barr.
SVB collapsed in spectacular fashion following a tech-fueled run on the bank, with the institution finding itself without sufficient liquidity to redeem all accounts. Eventually, the FDIC stepped in to take over the bank, which was once the most prominent venture-focused bank in the San Francisco Bay area.
While most all observers understand that SVB took on too much interest rate risk and management failed to act to mitigate this risk, this does not forgive the failure of bank regulators, which hold incredible power in regard to the operations of chartered banks.
Vice Chair for Supervision Barr admitted that supervision and regulation must be strengthened based on what they have learned from the report.
Fed Chair Jerome Powell welcomed the “thorough and self-critical report,” adding that he supports the recommendations to address the rules and supervisory practices and claiming they will “lead to a stronger and more resilient banking system.”
The key takeaways of the report include:
- Silicon Valley Bank’s board of directors and management failed to manage their risks;
- Federal Reserve supervisors did not fully appreciate the extent of the vulnerabilities as Silicon Valley Bank grew in size and complexity;
- When supervisors did identify vulnerabilities, they did not take sufficient steps to ensure that Silicon Valley Bank fixed those problems quickly enough; and
- The Board’s tailoring approach in response to the Economic Growth, Regulatory Relief, and Consumer Protection Act and a shift in the stance of supervisory policy impeded effective supervision by reducing standards, increasing complexity, and promoting a less assertive supervisory approach.
The 118-page document points a finger at the shortcomings of regulators, stating the first steps will be to focus on improving the speed and agility of supervision, indicating regulators were profoundly slow to act on an issue that is now obvious. SVB quickly grew from $71 billion to more than $211 billion in assets from 2019 to 2021, yet regulatory standards did not adjust. Supervisors identified the vulnerabilities but did little to compel SVB to redress the problem.
The report states that the Fed will revisit how they supervise a bank’s management of interest rate risk. At the same time, the Fed will evaluate capital requirements for banks.
Barr describes the report as a “self-assessment, a critical part of prudent risk management” while welcoming outside reviews. Barr comments on the “contagion” concerns that imperiled the broader banking system, something, in hindsight, should have been abundantly clear.
The document may be downloaded here.